Unfortunately, and on the minds of many businesses until today, Congress did not initially address whether business expenses, if used in a qualifying manner that would allow for loan proceeds to be partially or wholly forgiven, could be deductible. Subsequently, which compounded business owner’s concerns further, the Internal Revenue Service (“IRS”) issued guidance advising applicable businesses that, under the Internal Revenue Code, no deduction would be allowed for the payment of expenses in a manner that results in PPP loan forgiveness; the IRS theorized that since the income associated with such loan forgiveness is excluded from the taxpayer’s gross income, the associated expenses should not be deductible expenses utilized to offset income (Notice 2020-32; Revenue Ruling 2020-27).
Thankfully, on January 7, 2021, the IRS issued new guidance to reflect the Tax Relief Act of 2020, passed by Congress on December 21st by way of inclusion in the Consolidated Appropriations Act, 2021, Public Law 116-260, which among other things amended certain portions of the CARES Act. This new IRS Guidance, promulgated in Revenue Ruling 2021-02 available at https://www.irs.gov/pub/irs-drop/rr-21-02.pdf, made clear that Notice 2020-32 and Rev. Rul. 2020-27 are now, in effect, no longer accurate and henceforth obsolete. Accordingly, the Tax Relief Act of 2020, in conjunction with Revenue Ruling 2021-02, specifically provides that no deduction shall be denied, no tax attribute reduced, and no basis increase shall be denied, as a result of the exclusion - from an eligible taxpayer’s gross income - of PPP loan forgiveness proceeds. This amendment, of course, applies only to taxable years ending after March 27, 2020, the initial date of enactment of the CARES Act (CARES Act § 276(a)(2)).
For more information about this, the COVID-related Tax Relief Act of 2020, or any other related or unrelated questions, please feel free to reach out to a member of our team.