The IRS issues guidance on the ability to deduct eligible PPP expenses

On January 6, 2021, the IRS provided new guidance on the topic of deductible expenses related to the SBA’s Paycheck Protection Program (PPP).  The new guidance (Rev. Rul. 2021-2) will allow borrowers to deduct eligible expenses paid for with PPP funds, even if those eligible expenses could result in the forgiveness of the loan.  This applies for taxable years ending after March 27, 2020.

The new change in direction will potentially help small businesses

In November 2020, the IRS ruled that borrowers would not be able to deduct eligible expenses if their PPP loan was forgiven, or if they could expect it to be forgiven (Rev. Rul. 2020-27). While the PPP forgiveness is tax-free, the previous inability to deduct expenses had the potential to put a burden on already struggling small businesses.

This new guidance is a result of COVID-19 relief legislation passed by Congress in December 2020, which is intended to further support small businesses impacted by the pandemic.  As a result, the new IRS guidance states: “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided by §7A(i)(1) of the SBA”.  This change in direction should have a positive impact on many small businesses who have utilized the SBA’s PPP funding to help keep their businesses open and their staff employed.

If you’re interested in learning more about PPP loan forgiveness or to request additional deduction guidance, please contact a Bank of Southern California Banker today.