The IRS has recently issued a ruling, IRS – Rev Rul. 2020-27, stating that businesses that get their PPP loan forgiven in 2020, or have a REASONABLE EXPECTATION of forgiveness in the near future, cannot claim a tax deduction for the eligible expenses paid during the 2020 taxable year.

In other words, if you took out a PPP loan, and used the proceeds for covered expenses like payroll, rent, and utilities, and reasonably expect that you would get forgiveness for the loan, even if you don’t apply for forgiveness this year, you need to treat the loan as forgiven in 2020.

As a result, any covered expenses that are paid using a PPP forgiven loan, for which no cancellation of debt income (COD) results, are not allowable as tax deductions in the 2020 tax year.

As a basic example, if you received a $45,000 PPP loan and it gets fully forgiven in 2020 or you reasonably expect it be fully forgiven, then

there is no COD income for the loan forgiveness on your Entity tax return,

But you LOSE the tax deduction for the expenses paid with the PPP loan, so

Net/net, you decrease your 2020 expenses on your tax return by $45K, AND

This will result in an increase of your net income by $45K on the 2020 entity tax return

PPP Loan Fraud Will Most Likely be in the Billions

Further, on the PPP front, it appears that shockingly (umm, well who are we kidding… expectedly) the loan submissions were rife with fraudulent applicants. This interesting article states that the House Select Subcommittee on the Coronavirus Crisis estimates the fraud at over $4 Billion American dollars. Yes with a Capital B. Unfortunately, this comes as no surprise. Here’s a link to the article.

https://www.nytimes.com/2020/12/09/business/ppp-fraud-paycheck-protection-program.html?referringSource=articleShare

Hopefully you all are enjoying your holiday season so far, despite these trying times.

If you get a chance, take a look at my new website:

www.thesullivanlaw.com

And YouTube Channel:

https://www.youtube.com/channel/UCb9o8tVG19Muf1HMOT5kURw