PPP Loan Forgiveness, " Deductible Expenses with PPP Loans & the 2nd Round of PPP Loans", article by Rolf Neuweiler, 1/5/2021, a2zCFO.com

Apply Non-deductible Business Expenses Related to PPP Loans in 2020 Taxes

The IRS rules that payroll and business expenses that PPP loans helped to cover in 2020 are not deductible in determining 2020 business taxes.

For businesses that took out PPP loans in spring 2020, the IRS does not allow “double dipping” by deducting business expenses associated with the forgivable portions of your PPP loan, as we last discussed in the article “PPP Loans Affect 2020 Business Taxes”.

Exclude the expenses as deductions if used to obtain PPP loans, in determining 2020 taxable income 

If it can be reasonably expected that a PPP loan will be forgiven, partially or entirely, payroll and business expenses which were used as the bases for obtaining the PPP loan are nondeductible for the tax year when the expenses incurred. For most businesses with fiscal year ending December 31, 2020, their 2020 business taxable income cannot be lowered by using the same payroll, utilities, interest, rent and other business expenses as deductibles if these expenses and payroll were exactly what your PPP loan covered in 2020, according to the ruling issued by the IRS on November 18, 2020, “Revenue Ruling 2020-27”.

The above rule applies regardless of the following:

  • When PPP forgiveness applications are filed, in 2020 or 2021, 
  • When the forgiven payroll and other allowable expenses occur,
  • Whether forgiveness application is filed or not,
  • Whether the PPP loan is forgiven or not.   

The expenses are nondeductible in 2020. Period.

If your fiscal year is not the same as the calendar year, …

Suppose a business received a PPP loan in April 2020, and its next fiscal year started in October 2020.  Assuming further that all of the nondeductible expenses incurred between April and October 2020, its taxable income for the October 2020 fiscal year-end tax return should be calculated without deducting the non-deductibles, thus most likely higher, since a PPP loan is also regarded as an “income”.

But if the same company’s fiscal years started in July, and it did not spend all of its PPP loan in three months from the time it received the loan in April till July, 2020, it seems reasonable that the nondeductible expenses can go into 2021 fiscal year from July 2020 till July 2021, but the above IRS ruling is not clear about this. 

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