As the end of the 2020 calendar year and PPP covered period, many clients have questions concerning whether they can deduct the business expenses that they paid with PPP funds. This topic has been in the news frequently, and many hoped Congress would draft additional legislation specifically addressing deductibility. That has not happened. The IRS recently issued a Revenue Ruling and Revenue Procedure explaining its tough stance. The following should assist you in understanding IRS guidance as you continue evaluating your situation.
- Has your PPP loan been forgiven?
If your loan has already been forgiven, you cannot deduct the expenses.
- Did you follow IRS guidance for PPP fund use and reasonably expect that your PPP loan will be forgiven?
If yes, you reasonably expect that your loan will be forgiven, then you may not deduct your expenses. This is the same whether or not you’ve already applied for loan forgiveness and have not heard back from the lender or will apply in 2021.
- What if I am wrong and my loan (or a portion of it) is not forgiven after I’ve filed my 2020 return?
The IRS is allowing a safe harbor. Make sure that you timely file all returns and extensions. If your application for forgiveness is denied, you may deduct covered expenses either on the original return or on an amended one. This safe harbor also applies if you irrevocably decide not to seek forgiveness. However, Revenue Procedure 2020-51 identifies very specific procedures to follow, including filing an additional statement with your return with certain information required by the IRS.
Please give Law Offices of Christy Lee, P.C. a call if you want to audit proof your 2020 tax return. Our focus, as always, is to help your business succeed.