IRS Issues Guidance on Deductibility of PPP Expenses

The IRS will allow businesses that had their Paycheck Protection Program loans forgiven to write off expenses paid for with that money.

The Internal Revenue Service (IRS) and the Treasury Department released guidance on Wednesday on claiming deductions for expenses associated with Paycheck Protection Program (PPP) loans that have been forgiven.

The IRS released Revenue Ruling 2021-02, which reverses previous guidance issued last year by the IRS and the Treasury in which the IRS denied taxpayers’ ability to deduct expenses related to forgiveness of PPP loans.

Revenue rulings represent interpretation by the IRS of provisions of the tax code. Although they are not law, taxpayers that take a position contrary to revenue rulings will most certainly end up in costly litigation with the IRS, which pays its attorneys by the year, not by the hours.

Various accounting and professional groups, including the American Institute of Certified Public Accountants (AICPA), lobbied for the ability to write off such expenses. The groups argued it would help struggling businesses and was in line with congressional intent when the CARES Act was passed last year setting up the PPP loans as a way to get money quickly into the hands of desperate business owners, and, to keep from overwhelming state unemployment agencies in the wake of the initial COVID-19 lockdowns.

The latest coronavirus relief bill included a provision that allows the expenses to be deductible and revives the PPP with a fresh round of $284 billion in funding. It will allow expenses related to seeking forgiveness of the Small Business Administration (SBA)-backed loans to be deducted by businesses that received the loans, and the revenue ruling expands this provision to the first round PPP loans.

This is a very timely development as new revenue ruling thus obsoletes the old guidance from the IRS and the Treasury last year in Notice 2020-32 and Revenue Ruling 2020-27, which said the PPP loan forgiveness expenses could not be deducted. The obsoleted guidance disallowed deductions for the payment of eligible expenses when the payments resulted (or could be expected to result) in forgiveness of a covered loan, but that has been changed now in the new guidance.

The previous ruling also took the position that the payments weren’t deductible in the year the loan was funded, regardless of the year in which forgiveness took place. Many alarm company owners were facing a hefty tax bill on expenses paid to employees and others for expenses funded by PPP proceeds, the proceeds of which were not intended to be taxed.

We became aware of the IRS’ intent to publish the ruling two weeks ago and hustled to get the word to our clients so that they could reduce their estimated tax payments, which were due by December 31.

Although the release of the COVID-19 vaccine is the light at the end of the pandemic tunnel, many alarm company owners are looking forward to the new round of PPP funding available under the latest relief bill.

When the CARES Act was passed last spring, popular opinion was that the pandemic would be under control in “a few months,” so the act was substantially focused on bridging short-term issues. As we all know this did not happen and many small businesses and their employees have continued to struggle.

We are watching developments with the SBA and banks and will update you as the provisions of the second round of PPP funding, which will further restrict loan availability to businesses which underwent significant challenges — including a provision that gross revenues must have decreased by at least 25% in one quarter of 2020 over the same quarter of 2019 — and whose ability to continue as a going concern has been impaired by the pandemic. Stay tuned to SSI and we will keep you informed.


Mitch Reitman is Managing Principal of Reitman Consulting Group, a member of the SSI Editorial Advisory Board and an SSI Industry Hall of Fame inductee.  He can be reached at (817) 698-9999 or MReitman@Reitman.US.

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