New law and updated PPP guidance on deducting eligible expenses paid with PPP loan proceeds
The new law provides that taxpayers are allowed deductions because of the exclusion from income of the recipient’s forgiven PPP loan.
New Treasury Department and IRS guidance allows taxpayers to deduct eligible expenses paid with proceeds of PPP loans that have been forgiven.
Previous guidance on PPP loans and forgiven expenses
The CARES Act, modified by the PPPFA, allows taxpayers to seek forgiveness of PPP loans if at least 60% of loan proceeds are spent on payroll costs and the balance on other eligible business expenses which include mortgage interest, rent, and utilities.
Under the CARES Act any forgiven PPP debt is not included in gross income. However, under the guidance in IRS Notice 2020-32 and Rev. Rul. 2020-27 (covered in TAX in the News May 6, 2020 and December 2, 2020 respectively), expenses paid with proceeds of PPP loans that were forgiven or expected to be forgiven were not deductible. This was so even though payroll costs, etc. are ordinary and necessary business expenses.
PPP loan changes in CAA21
IRS news release IR-2021-04 and Rev. Rul. 2021-02 amend guidance to align with CAA21. The new law provides that “no deduction is denied, no tax attribute is reduced, and no basis increase is denied” because of the exclusion from income of the recipient’s forgiven PPP loan.
The change is effective for tax years ending after March 27, 2020 (tax year 2020 for calendar year taxpayers).
Accordingly, the earlier guidance in Notice 2020-32 and Rev. Rul. 2020-27 is obsolete as of the effective date of the amendment. Ordinary and necessary business expenses paid with PPP loan proceeds are deductible. The law also makes clear that the exclusion from income does not impact other tax attributes, such as partner or shareholder basis.
Note, the IRS previously issued Rev. Proc. 2020-51 (also discussed in TAX in the News December 2) with a safe harbor for deducting expenses when forgiveness has been denied or the taxpayer decides not to seek forgiveness. Although not called out in Rev. Proc. 2021-02, this safe harbor guidance is no longer needed and is presumably obsolete as well.
CAA21 also provides a PPP loan “second draw” and adds expenses eligible for PPP loan forgiveness, including software, supplies, and PPE.