DC Tax Flash: IRS Instructs on Deducting Expenses by Businesses That Received PPP Loans

Tax Alert

The Internal Revenue Service (IRS) today issued two pieces of guidance regarding loans issued under the Paycheck Protection Program (PPP) and certain deductions otherwise available to participating business.

"Since businesses are not taxed on the proceeds of a forgiven PPP loan, the expenses are not deductible," a Treasury Department press release explains. "This results in neither a tax benefit nor tax harm since the taxpayer has not paid anything out of pocket." 

Where a PPP loan is not forgiven in the year received, today's guidance provides clarification of the tax treatment for business expenses. The IRS describes the guidance as follows:

  • Revenue Procedure 2020-51 provides a safe harbor for certain PPP loan participants, whose loan forgiveness has been partially or fully denied, or who decide to forego requesting loan forgiveness, to claim a deduction for certain otherwise deductible eligible payments on (1) the taxpayer's timely filed, including extensions, original income tax return or information return, as applicable, for the 2020 taxable year, or (2) an amended return or an administrative adjustment request (AAR) under section 6227, as applicable. For taxpayers that decide to forego requesting loan forgiveness, the safe also allows these taxpayer to claim a deduction for the otherwise deductible eligible payments on an original income tax return or information return, as applicable, for the taxable year in which the taxpayer decides to forego requesting forgiveness
  • Revenue Ruling 2020-27 provides guidance on whether a PPP loan participant that paid or incurred certain otherwise deductible expenses can 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 covered loan.  The revenue ruling also provides guidance if, as of the end of the 2020 taxable year, the PPP loan participant has not applied for forgiveness, but intends to apply in the next taxable year.

​"If a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not," the Treasury Department notes. "In the case where a PPP loan was expected to be forgiven, and it is not, businesses will be able to deduct those expenses."

In the Senate, several senior taxwriters, including Finance Committee Chairman Charles Grassley (R-IA) and Ranking Member Ron Wyden (D-OR), have argued that the IRS position on this issue conflicts with legislative intent. They support Sen. John Cornyn's (R-TX) bill that would make it clear that deductions for ordinary business expenses (and other tax attributes) are unaffected by PPP loan forgiveness. More than one-third of the Senate has cosponsored the legislation (S. 3612).

Miller & Chevalier Coronavirus Task Force
The outbreak of COVID-19 is creating significant business and legal challenges for companies throughout the world. In response to client demand, the firm has formed an interdisciplinary task force to help businesses navigate these issues.

COVID-19 Resource Library
We also maintain a resource library of legislative responses and regulatory guidance related to COVID-19.

The information contained in this communication is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information, please contact one of the senders or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.

This, and related communications, are protected by copyright laws and treaties. You may make a single copy for personal use. You may make copies for others, but not for commercial purposes. If you give a copy to anyone else, it must be in its original, unmodified form, and must include all attributions of authorship, copyright notices, and republication notices. Except as described above, it is unlawful to copy, republish, redistribute, and/or alter this presentation without prior written consent of the copyright holder.