PPP expenses not deductible if taxpayer believes forgiveness will occur in future

by Megan Roberts, Extension educator

Since late March, Congress, Treasury, the Small Business Administration, and the Internal Revenue Service have issued regular changes to the Paycheck Protection Program. On November 18, the IRS issued Revenue Rule 2020-27, which updates interpretation of tax deductibility of PPP related expenses in 2020. Treasury and the IRS now indicate that if a PPP recipient reasonably believes their loan will be forgiven, they should not deduct any associated PPP eligible expenses on their 2020 tax returns regardless of whether forgiveness has been received. Previously, the interpretation of the earlier issued Notice 2020-32 was that PPP associated expense deductions were allowed on 2020 tax returns if the loan was not yet forgiven. If forgiveness was later received in 2021, the previous interpretation was the 2020 deductions would then be subject to tax recapture in 2021. To reiterate, IRS now says that if there is reasonable belief by the taxpayer that a PPP loan will be forgiven--whether or not it has actually been forgiven--then no associated PPP eligible expenses should be deducted on 2020 tax returns. 

The PPP disbursement amount remains non-taxable income, as has been the case since the inception of the program. Furthermore, if self-employed individuals without employees use their PPP disbursement for solely owner's compensation recoupment, this latest rule is moot. Owner's compensation is already non-deductible. If other eligible expenses were not used for PPP they can stay on this year's tax forms as tax-deductible expenses for the self-employed. 

Throughout this time, our intent on this blog is to bring educational awareness to Covid-19 farm financial relief program changes when they occur, recognizing information that was correct in the past may become obsolete as additional federal guidance is issued. PPP forgiveness is an evolving situation; please note Congress or the courts may step in to change this interpretation.

For more detailed legal interpretation of Revenue Rule 2020-27, Kristine Tidgren of Iowa State Extension provides further information at the Center for Agricultural Law and Taxation website.