The IRS Affirms Tax Treatment PPP Loan Program and the Expense Deductibility of Related Expenses

The IRS issued Rev. Rul. 2020-27 which discusses the tax treatment of expenses paid by a taxpayer that relate to PPP loan proceeds under section 1106(a) of the CARES Act.  This section of the CARES Act defines eligible expenses for the purposes of the PPP loan.  The IRS re-affirmed two previous announcements related to the PPP loan program. The two re-affirmations are:

  1. The eligible expenses used to secure the PPP loan proceeds are not deductible in computing the taxpayer’s taxable income.
  2. The disallowance of the deduction of these eligible expenses is to be reflected in the taxable year the expenses were paid or incurred, if the taxpayer reasonably expects to receive forgiveness for the PPP loan, even if the taxpayer has not submitted that application for forgiveness.

The disallowance of what would normally be deductible expenses, effectively makes the PPP loan proceeds taxable. The IRS did not address what a taxpayer should do if they disallow the expenses, but are subsequently denied forgiveness in the following tax year.