Earlier in the year, the IRS issued guidance indicating that expenses incurred related to the forgiven portion of the Paycheck Protection Program (PPP) loan would not be deductible. Since then, it has been unclear as to the period those expenses would become non-deductible. Would the deduction be disallowed in the period expenses were incurred or when the loan forgiveness approval from the Small Business Administration was received? The IRS has now issued guidance that clarifies the timing of a deduction for any otherwise deductible expense in forgiveness of a PPP loan.
The general rule is that if there is a reasonable expectation of forgiveness of the PPP loan, the expenses are not deductible in the period in which they were paid or incurred. This is true even if the taxpayer has not applied for forgiveness or received a forgiveness decision by the end of the taxable year.
The IRS also issued a safe harbor where a taxpayer can claim a deduction in the taxpayer’s tax year beginning or ending in 2020 for certain otherwise deductible eligible expenses if (1) the eligible expenses are paid or incurred during the taxpayer’s 2020 tax year; (2) the taxpayer received a loan guaranteed under the PPP that at the end of the taxpayer’s 2020 tax year, the taxpayer expects to be forgiven in a tax year after the 2020 tax year; and (3) in a subsequent tax year, the taxpayer’s request for forgiveness does not subsequently occur either because the forgiveness application is denied in full or in part or because the taxpayer has decided not to apply for forgiveness. If the deductions are desired in 2020 under these circumstances, they can be claimed on (1) a timely-filed (including extensions) original tax, or information, return for the 2020 tax year, or (2) an amended 2020 tax, or information, return (or an administrative adjustment request for partnerships). Alternatively, the deduction can be claimed on a timely filed original tax or information return for the subsequent taxable year.