IRS Confirms PPP Loan Forgiveness is Taxable in 2020

We were anxiously awaiting guidance from the IRS regarding how to treat expenses related to the PPP loan forgiveness and if they would be deductible. The wait is over!

The IRS provided Revenue Ruling 2020-27 to answer this question stating expenses should be disallowed in 2020 if the PPP borrower “reasonably expects to receive forgiveness of the covered loan based on the otherwise deductible expenses, even if the taxpayer has not submitted an application for forgiveness or receives a decision on its loan forgiveness application in 2020.”  Forgiveness of the PPP loan was stated in the CARES Act to be treated as non-taxable income. However, the Internal Revenue code states that expenses related to non-taxable income are disallowed for tax purposes. This left many questioning whether PPP expenses would be deductible and the timing since for many the expenses were incurred in 2020 but the loan will not be forgiven until 2021.

There are still unanswered questions, but the Ruling did clearly state that if you reasonably expected the loan to be forgiven at the end of 2020, and before you filed your return for 2020, some or all of the forgiveness was denied, those expenses related to that amount of denied forgiveness would be deductible in 2020.  If the return had already been filed, an amended return would need to be filed to secure the deduction for 2020.

If you have any questions, please contact your Kerkering Barberio team member at (941) 365-4617 or visit our website at KBGRP.com.