IRS Obsoletes Previous Guidance on Deductibility of PPP Loan Expenses

(Parker Tax Publishing January 2021)

The IRS issued a ruling obsoleting Notice 2020-32 and Rev. Rul. 2020-27, which provided that recipients of loans under the Paycheck Protection Program (PPP) were not entitled to deduct certain otherwise deductible expenses to the extent that the payment of such expenses resulted (or was expected to result) in the forgiveness of the loan guaranteed under the PPP. The ruling states that, as a result of the enactment of Section 276(a) of the COVID-Related Tax Relief Act of 2020, which provides that no otherwise deductible amount is includible in the gross income of an eligible PPP recipient by reason of forgiveness of a PPP loan, the conclusion stated in Notice 2020-32, and the holding stated in Rev. Rul. 2020-27, are no longer accurate statements of the law. Rev. Rul. 2021-2.

In Notice 2020-32 and Rev. Rul. 2020-27, the IRS provided that certain taxpayers (eligible recipients) could not deduct otherwise deductible expenses to the extent that the payment of such expenses results (or is expected to result) in the forgiveness of a loan (covered loan) guaranteed under the Paycheck Protection Program (PPP). The PPP was authorized under Section 7(a)(36) of the Small Business Act (SBA), as enacted by Section 1102 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Section 1106(b) of the CARES Act provides for the forgiveness of covered loans if certain criteria are met, and Section 1106(i) of the CARES Act provides that any amount that otherwise would be includible in an eligible recipient's gross income by reason of such forgiveness is excluded from gross income.

Section 1106(i) of the CARES Act was amended by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, which was enacted by the Consolidated Appropriations Act, 2021 (Pub. L. 116-260). Section 276(a) of the Covid-Related Tax Relief Act of 2020 (the Act) was amended to provide that no amount is included in the gross income of an eligible recipient by reason of forgiveness of indebtedness under the PPP. In addition, Section 276(a) provides that no deduction will be denied, no tax attribute will be reduced, and no basis increase will be denied, by reason of this exclusion from gross income. The amendment applies to tax years ending after March 27, 2020, the date of the enactment of the CARES Act.

On January 6, the IRS issued Rev. Rul. 2021-2, which provides that, as a result of the amendment made by Section 276(a) of the Act regarding the federal income tax consequences of covered loan forgiveness, the conclusion stated in Notice 2020-32, and the holding stated in Rev. Rul. 2020-27, are no longer accurate statements of the law. Accordingly, Notice 2020-32 and Rev. Rul. 2020-27 are declared obsolete as of the effective date of the amendment made by Section 276(a) of the Act.

For a discussion of the discharge of indebtedness and the Paycheck Protection Program, see Parker Tax ¶72,340.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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