Update on Deductibility of Expenses Paid With Forgiven PPP Loans

Tax Law

The IRS released an advance version of Rev. Rul. 2021-2, which is consistent with a legislative change allowing taxpayers to deduct otherwise deductible expenses paid with the proceeds of a Paycheck Protection Program (PPP) loan that is forgiven (or expected to be forgiven).

As described in a previous client alert (“Expenses Paid With Forgiven PPP Loans Not Tax Deductible,” dated May 1, 2020), the IRS formerly issued guidance in Notice 2020-32 and Rev. Rul. 2020-27 (both of which Rev. Rul. 2021-2 makes obsolete) maintaining that recipients of PPP loans were not allowed to deduct expenses that otherwise would be deductible if said expenses were expected to result in forgiveness of said loans. However, the IRS reversed course following the enactment of the Consolidated Appropriations Act, 2021 (Pub. L. No. 116-260) on December 27, 2020 (the “Act”), which clarified the tax treatment of business expenses paid with PPP forgiven loans. In particular, the Act provides that no deduction will be denied, no tax attribute reduced and no basis increase denied by reason of the exclusion of PPP loan proceeds from gross income. This provision from the Act is effective for tax years ending after March 27, 2020, the date of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

How Manatt Can Help: Manatt’s tax practice is keeping abreast of the various tax aspects of the loans received under the PPP. We are here to help clients navigate these new and changing requirements and take full advantage of the loan forgiveness relief being made available.

For More Information: Contact David Herbst, partner, Manatt Tax, at 650.812.1320; Jeffrey A. Mannisto, partner and leader, Manatt Tax, 310.312.4212; or Jonathan Weiss, attorney, Manatt Tax, at 310.312.4156.

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