Businesses that received loans under the Paycheck Protection Program (PPP) may not be eligible to claim tax deductions for certain expenses. The Internal Revenue Service (IRS) has released Revenue Ruling 2020-27 and Revenue Procedure 2020-51, which prevent businesses from claiming tax deductions for eligible business expenses that were paid using proceeds from a PPP loan, assuming a business has or will receive loan forgiveness. The IRS considers this double-dipping.
According to the CARES Act, eligible business expenses that are tax deductible include payroll costs, mortgage interest, covered rent and covered utilities (electricity, gas, water, transportation, telephone or internet access). However, if PPP loans are used to pay for these expenses, the IRS has determined that those who apply for forgiveness of these loans cannot then claim those expenses as tax deductible. The formal ruling can be found here.
The Revenue Procedure 2020-51 provides a safe harbor for taxpayers with PPP loans if they meet and comply with certain requirements. These requirements include:
- incurring or paying the eligible expenses in 2020;
- expecting the loan to be forgiven in a taxable year after 2020;
- having an application for loan forgiveness denied in 2021 or deciding not to request forgiveness of the covered loan.
If taxpayers with PPP loans meet these requirements, they will be allowed to deduct expenses that were originally thought to be non-deductible as long as the return is filed on a timely basis or is amended in the taxable year.
Several procedures need to be followed and statements submitted in order to qualify for the safe harbor. The formal Revenue Procedure 2020-51 containing this information can be found here.
Many lawmakers hoped to make the PPP expenses tax deductible. However, the IRS has now made it clear that expenses paid with the PPP loans are non-deductible in 2020 unless the narrow safe harbor rules are met.