The Treasury and IRS recently clarified the tax treatment of expenses for businesses who secured a PPP loan not forgiven by the end of the year the loan was received.
Whether or not a business has filed for forgiveness, if the business believes that their PPP loan will be forgiven, then expenses related to the loan are NOT deductible in the year they are incurred (paid if a cash basis taxpayer).
If a business believes that their PPP loan will be forgiven, the expenses are NOT deductible in the year they are incurred (paid if a cash basis taxpayer). However, if the Small Business Administration later does not forgive the PPP loan in full, the expenses to the extent the loan was not forgiven become deductible. See the safe harbor below for the year the expenses become deductible.
Safe Harbor exists for those taxpayers who file their 2020 returns (calendar year taxpayers) with the expenses disallowed, but then have their PPP loan partially or fully denied. Taxpayers will have the option to deduct the disallowed expenses to the extent the loan is not forgiven by filing an amended 2020 return, or deduct them on their 2021 income tax return. See Revenue Procedure 2020-51 for details.
The new IRS ruling can be found [here]. Congress always has the ability to rule on the deductibility of expenses.
If you need assistance determining the year the expenses are deductible, please contact us at 401-831-0200.