IRS Issues Guidance on Deductibility of Qualified PPP Expenses

The IRS yesterday issued a ruling that borrowers expecting Paycheck Protection Program loan forgiveness applications to be approved must disallow a deduction for qualified 2020 expenses in 2020 tax returns, even in situations where the forgiveness application has not been approved or filed by the end of the year.

Earlier this year, the IRS said that qualified expenses that generate PPP loan forgiveness are non-deductible. Yesterday’s ruling was issued in response to questions raised about non-deductible expenses in situations where the expenses are paid in 2020 and the forgiveness of the loan may not occur until 2021. While ABA acknowledged the reduction in uncertainty afforded by the guidance, it warned that the interpretation could accelerate non-deductibility with a negative effect on PPP borrowers’ cash flow.

The IRS also issued a revenue procedure that provides guidance for PPP borrowers that either do not apply for forgiveness or have all or part of the forgiveness application denied.