Late Wednesday, the IRS released Revenue Ruling 2020-27, which clarified its stance on the timing of Paycheck Protection Program (PPP) loan forgiveness and related tax implications. This much anticipated guidance arrived just in time for businesses to make any necessary adjustments before year end.

When PPP loans were first issued, many believed the intent was to provide businesses with a forgivable loan that would be excluded from taxable income and ease the burden of continuing operations during the pandemic. However, back in May, the IRS issued Notice 2020-32, which informed taxpayers that “no deduction is allowed for an eligible expense that is otherwise deductible if the payment of the eligible expense results in forgiveness of the covered loan.” Many saw this ruling as a back-door way to convert the loans into taxable income. Even though the IRS was not directly taxing forgiven PPP loans, they were increasing taxable income by not allowing related deductions, such as payroll and utilities.

The ruling also seemed to imply that the deductions could still be taken if the loan was not yet forgiven. Based on this assumption, many taxpayers considered waiting until 2021 to apply for loan forgiveness, hoping to defer an increased tax bill for another year.

However, in the latest ruling, the IRS confirmed its position that expenses paid for with PPP funds are nondeductible and clarified the timing issue related to loan forgiveness. If there is a “reasonable expectation” that the PPP loan will be forgiven, then otherwise deductible expenses that are related to the loan should not be deducted in 2020, regardless of when forgiveness is applied for or received. This means that PPP loan recipients should not take PPP related deductions in 2020 if they reasonably expect the loan to be forgiven. With this new guidance, PPP loan recipients should prepare for a 2020 income tax bill that may be higher than originally anticipated.

Buckley Fine will continue to monitor the evolving guidelines surrounding PPP loans, and we advise our clients to consult with their tax preparers. If you need a referral to a qualified accountant or just have a question regarding your PPP loan, please feel free to contact any one of our attorneys.