In their new guidance, the U.S. Treasury Department and the Internal Revenue Service (IRS) clarified the tax treatment of a Paycheck Protection Program (PPP) loan which was not forgiven by the end of the year the loan was received.
Expenses of a forgiven PPP loan are not tax deductible. For business not taxed on the proceeds of a forgiven PPP loan, the loan expenses are neither a tax benefit nor tax harm.
As stated in the press release of the U.S. Department of the Treasury “If a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not. “
In the case where a PPP loan was expected to be forgiven, and it is not, businesses will be able to deduct those expenses, even if the loan was initially considered forgivable.
Information regarding the eligibility of expenses for tax deduction is available in the IRS publications Rev. Rul. 2020-27 and Rev. Proc. 2020-51.