IRS Reaffirms Deductibility of Eligible PPP Expenses

Sometimes it’s best not to pick a fight with Congress, because the lawmakers will likely have the final say. Such is the case with respect to the deductibility of eligible expenses under the Paycheck Protection Program (PPP). 

The Treasury Department and the IRS on Jan. 6 issued guidance confirming that deductions are allowed for the payments of eligible expenses when such payments would result—or be expected to result—in the forgiveness of a covered loan under the PPP.

The guidance, issued in Revenue Ruling (Rev. Rul.) 2021-02, reflects changes contained in the COVID-related Tax Relief Act of 2020, which was enacted as part of the mammoth year-end Consolidated Appropriations Act, 2021 signed into law Dec. 27, 2020. 

The Act amended the Coronavirus Aid, Relief, and Economic Security (CARES) Act retroactively to say that no deduction is denied, no tax attribute is reduced, and no basis increase is denied by reason of the exclusion from gross income of the forgiveness of an eligible recipient’s covered loan. As such, the change applies for tax years ending after March 27, 2020.

Last April, the IRS advised in Notice 2020-32 that it will not allow a tax deduction for an expense that is otherwise deductible under Code Sections 162 and 163 if the payment of the expense results in forgiveness of a covered loan under the PPP. And then in November, the agencies doubled down on that guidance in Rev. Rul. 2020-27, holding that a taxpayer may not deduct eligible expenses in its 2020 tax year if the taxpayer has a reasonable expectation of their loan being forgiven, even if the PPP loan participant had not yet applied for forgiveness as of the end of the 2020 tax year. 

When the IRS released Notice 2020-32 and Rev. Rul. 2020-27, the chairmen of the congressional tax-writing committees expressed their concern about the IRS’ interpretation and advised that they would pursue clarification in year-end legislation that these covered expenses are deductible—which, as it turns out, is exactly what happened. 

Now, in Rev. Rul. 2021-02, the IRS states that, “As a result of the amendment made by Section 276(a) of the Act regarding the Federal income tax consequences of covered loan forgiveness, the conclusion stated in Notice 2020-32, and the holding stated in Rev. Rul. 2020-27, are no longer accurate statements of the law.” Accordingly, the notice and revenue ruling are declared obsolete. 

Rev. Rul. 2021-02 will be in Internal Revenue Bulletin 2021-04, dated Jan. 25, 2021.