The Paycheck Protection Program (“PPP”) is a stimulus program which took effect under the CARES ACT passed in March of 2020 in response to the COVID-19 Pandemic. The program provided loans for small businesses to ensure up to eight weeks of payroll and other expenditures were covered while most businesses had limited operations or were completely shut down due state and local health and safety regulations instated to combat the COVID-19 Pandemic. These loans were meant to be forgivable upon the small businesses who received the funding meeting certain requirements. The application period for the PPP ended in August of 2020. Now that companies will be soon closing their books for the 2020 year and looking to file their tax returns, the Internal Revenue Service (“IRS”) is issuing guidance for those companies in regard to the funds received under PPP. The IRS has recently released two new Revenue Rules, Revenue Procedure 2020-51 and Revenue Ruling 2020-27, regarding the forgiveness of those loans and allowed deductions. These revenue rules are summarized below.
Paycheck Protection Program loan participants who do not receive forgiveness, partially or fully, may claim deductions on eligible payments related to the year 2020 which are not otherwise deductible for the principal amount of the loan for which loan forgiveness was denied. The loan participant may deduct this amount in their timely filed tax returns, amended tax returned, or administrative adjustment request. Eligibility for deduction allows loan participants who did not request forgiveness to participate as well and therefore, someone who did not request forgiveness may deduct the full loan balance for expenses which are not otherwise deductible.
A Paycheck Protection Program loan participant who expects to receive forgiveness for otherwise deductible expenses paid or incurred under section 1106(b) of the CARES Act during the loan period, regardless of whether the participant applied for forgiveness or not, cannot deduct those expenses in the taxable year in which the expenses were paid or incurred.