Businesses With Forgiven PPP Loans May Lose Tax Deductions

No double dipping!

Under the SBA PPP loan program, businesses don’t have to repay their loan, it is “forgiven,” if most of the money covers essential expenses such as payroll.

Usually, wages are deductible expenses. Usually, forgiven debt counts as taxable income. But according to the CARES Act, any PPP loan forgiveness does not count as taxable income.

In recently issued guidance the IRS claims that paying expenses which result in the forgiveness of a PPP loan are not considered tax deductible – this is in order to prevent a "double tax benefit." The IRS cited Section 256 of the tax code, which states that deductions can't be taken if they are tied to a certain class of tax-exempt income.

The guidance is not welcome, but it clarifies a point of confusion in the $670 Billion SBA loan program to help businesses struggling as the Coronavirus has brought the economy to a standstill. The CARES Act states that the forgiven loan won’t be taxed, but didn’t specify whether companies could still write off the expenses they covered with that money. The tax code permits companies to write off business expenses such as wages, rent and transportation expenses, but generally doesn’t allow write-offs for tax-exempt income.

The AICPA has already protested. It believes strongly that the IRS’s interpretation denying deductions of expenses forgiven under the PPP program is contrary to Congress’s intent. Why waste the ink to say that for purposes of the Code, the loan forgiveness is not includible in income, if the government will just take away deductions in the same amount?

The AICPA believes the intent of the CARES Act was to allow businesses to deduct all their ordinary and necessary expenses — including any expenses used in determining PPP covered costs. The AICPA plans to seek legislative clarification. In fact bipartisan group of Senators introduced legislation Wednesday to enable small businesses to deduct their expenses even if they have received a loan from the federal government’s Paycheck Protection Program that was later forgiven.

Since this article was originally published, there have been further developments.

Based on the updated guidance released by the Internal Revenue Service (IRS) clarifying the deductibility of PPP loan expenses, most taxpayers who expect to receive full forgiveness of the PPP will not be eligible to deduct those eligible expenses paid using their PPP loans and the PPP loan is expected to be forgiven.

These taxpayers should consider the impact of this on their 2020 taxable income and potentially make additional 4th quarter estimated tax payments.

On November 18, 2020, IRS released updated guidance to the IRS’s prior position on the disallowance of deduction related to forgiven Paycheck Protection Program (PPP) loans in the form of two Rulings:

• Revenue Ruling 2020-27 provides taxpayers examples related to the timing of disallowance of the PPP related deductions.
• Revenue Ruling 2020-30 clarifies that no deduction is allowed under the Tax Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of the loan under the CARES Act, and the income associated with the forgiveness is excluded from gross income.
• Revenue Procedure 2020-51 provides taxpayers a safe-harbor for partially or fully denied loan forgiveness or for taxpayers deciding to forgo forgiveness, allowing the deduction of PPP related deductions.

Contrary to popular belief, Revenue Ruling 2020-27 and 2020-30 clarifies no ability to defer the tax due on PPP loan forgiveness regardless of when the taxpayer applied for and whether or not the lender has informed the taxpayer whether the loan will be forgiven before 2020 or thereafter.

Revenue Ruling 2020-27 states that a taxpayer that received a PPP loan and paid or incurred certain otherwise deductible expenses as provided for under the CARES Act may not deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the PPP loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for loan forgiveness of the PPP by the end of such taxable year.

SAFE HARBOR - Revenue Procedure 2020-51 provides a safe harbor allowing a taxpayer to claim a deduction in the taxpayer’s taxable year beginning or ending in 2020 for eligible expenses incurred in 2020 if the loan forgiveness is denied in part or whole in the following tax year, 2021. A taxpayer, as described below, may be able to deduct some or all of the eligible expenses on the taxpayer’s timely filed original income tax return for the 2020 taxable year, including extensions; an amended 2020 tax return; or a timely filed original income tax return for the subsequent tax year, including extensions.

A taxpayer meets the criteria for the safe harbor of this Revenue Procedure if:

• The taxpayer paid or incurred eligible expenses in the 2020 tax year for which no deduction is permitted because at the end of 2020 the taxpayer reasonably expects to receive forgiveness of the PPP loan based on the eligible expenses,
• The taxpayer submitted the PPP loan forgiveness application before the end of 2020 or as of the end of 2020 intends to submit the application in a subsequent taxable year, and
• In a subsequent taxable year, the lender notifies the taxpayer that forgiveness for all or part of the PPP loan is denied.

Alternatively, if the taxpayer irrevocably decides not to apply for forgiveness for some or all of the PPP loan, the taxpayer is eligible for the safe harbor to deduct some or all of the eligible expenses on their original 2020 tax return, amended 2020 tax return, or subsequent year’s tax return.

To apply for the safe harbor and claim the deductions, the taxpayer needs to attach a statement to the tax return in which the deductions are claimed. The statement must be titled “Revenue Procedure 2020-51 Statement” and include:

• The taxpayer’s name, address, social security number or employer identification number;
• The criteria under which the taxpayer is eligible for the safe harbor;
• The year in which the taxpayer will claim the deductions, either 2020 or the subsequent year.
• The amount and date of the PPP loan;
• The amount of PPP loan forgiveness denied or not sought after;
• The date which the PPP loan forgiveness was denied or not sought after, and
• The total amount of eligible expenses and non-deducted eligible expenses that are reported on the return.

Reach out to us: If you have received a PPP Loan and are struggling with the rules and regulations, we have a team of experts ready to help and a PPP Loan Forgiveness Guide HERE. Please reach out to us for assistance at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or call toll free 855-542-7537.