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2020-67: Deductions for expenses paid with PPP loans

November 18, 2020

We are receiving questions daily about whether taxpayers can deduct expenses paid with PPP loan funds in 2020 if their forgiveness is not granted until 2021. Unfortunately, there is currently no formal guidance from the IRS as to how these disallowed deductions should be reported on the taxpayers’ returns after the forgiveness occurs. However, we have heard from multiple sources that guidance is expected very soon. The language in IRS Notice 2020-32 seems to indicate that the deductions will be disallowed on the 2020 return, even if the forgiveness occurs in 2021. And we have seen informal comments that support this position, but nothing formal yet. At this point, we recommend that you plan for estimates based on the assumption that the 2020 expenses must be reduced, and consider extending 2020 returns until you have a better idea of what a taxpayer’s forgiveness amount will be. Also, keep in mind that we could get additional legislation allowing the deductions for federal purposes, though that doesn’t seem likely at this point. For California purposes, the FTB has taken the position that the deductions should be taken on the 2020 return, and then added back into income in the year the forgiveness occurs. However, we believe this position could change after the IRS issues formal guidance.

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