IRS Affirms Deductibility of Expenses Paid with PPP Funds
On November 17th, the IRS firmly planted its stance on the deductibility of expenses paid with PPP funds. The original ruling essentially stated that any expenses that were funded with PPP loan funds that were forgiven would be nondeductible. This guidance left a gray area making it seem as though if the funds had not yet been forgiven as of December 31, 2020, then the add-back of expenses could be deferred until 2022 when the 2021 tax return was filed. This would allow businesses additional time to not only plan for the additional taxes due, but also allow businesses additional time to get back on their feet.
With Revenue Ruling 2020-27 the IRS has reaffirmed its position that any expenses paid with PPP funds regardless of whether the funds have been forgiven or not must be treated as non-deductible as long as there is reasonable cause to believe that the funds will either be forgiven or that the taxpayer will apply for forgiveness in 2021.
For the unsuspecting business owner, this could have a major impact on their business come Springtime. Given the current political standoff in Washington, it is unlikely that we will see any movement with Congress passing legislation that will overturn this rule before the end of the year.
With all the uncertainty and with the IRS reaffirming their position regarding the deductibility of these expenses, tax planning will be more important than ever this year. Fortunately, we are here to help!