In new guidance, the IRS clarified that a taxpayer that received a Paycheck Protection Program (PPP) loan may not deduct expenses if, at the end of the tax year, the taxpayer reasonably expects the PPP loan to be forgiven, whether or not the taxpayer has actually requested that the loan be forgiven.
This new guidance reaffirms the position that the IRS took in April 2020. That guidance sparked a quick backlash from many tax professionals and businesses that were surprised given the CAREs Act express provision that a forgiven PPP loan would not be considered taxable income. Congressional leaders also urged the IRS to reverse its position, which they viewed as contrary to Congress’s intent. Congressional leaders have again expressed their displeasure with the IRS on this issue, and say they are working to include language in year-end spending legislation clarifying that taxpayers qualify for expense deductions even if their loans are forgiven.
If Congress does not act, many taxpayers will be put in a difficult position given the lack of guidance on PPP loan forgiveness, including potential adverse determinations by the Small Business Administration (SBA) as to whether the borrower had the requisite level of “need” for the loan to be forgiven.