Deduction Limitation for Expenses Paid with PPP Funds:

The IRS issued additional guidance on Wednesday, November 18, 2020, which expands on their prior position that otherwise deductible expenses that are paid using PPP loan funds are not deductible[1].  Revenue Ruling 2020-27 provides that if you received a PPP loan in 2020 and expect the loan to be forgiven because you have used the loan proceeds to pay for eligible expenses under the CARES Act during the 2020 tax year, you may not deduct such expenses paid for with PPP loan funds.  This restriction applies even if you have not applied for forgiveness by the end of the 2020 tax year, as long as you reasonable expect the PPP loan to be forgiven in 2020.

Practice Tip for Businesses That Report Taxes on Schedule C of Individual Return:

Personal income from a Schedule C business is not treated as an “expense” for tax purposes.  Therefore, based on guidance issued by the IRS as of this date, if you use your PPP loan for personal income replacement you will not have to worry about otherwise deductible expenses being disallowed under Rev. Rul. 2020-27 or IRS Notice 2020-32.  However, it is important to document that your PPP loan funds were paid to you (or for personal purposes) and not used on other eligible business expenses (such as rent or payroll to employees).

Safe Harbor for PPP Loan Not Forgiven:

The IRS also issued Revenue Procedure 2020-51 on November 18, 2020, which provides a safe-harbor for taxpayers whose PPP loan which was obtained in 2020. The safe-harbor applies to taxpayers that (1) are denied forgiveness on their PPP loans in a tax year subsequent to 2020, or (2) decide not to seek forgiveness of their PPP loans.  Under either one of these situations, a taxpayer may claim deductions for expenses paid with PPP loan funds on an originally filed return, amended return, or administrative adjustment request by following the procedures set out in Rev. Proc. 2020-51.

We encourage you to contact your tax advisors or our office to discuss how this IRS guidance impacts your business.

[1] IRS Notice 2020-32