November 20, 2020 – This week the IRS released guidance on whether a PPP loan recipient can deduct business expenses funded by a PPP loan that has not yet been forgiven.  Congress introduced legislation that would allow States, Indian Tribes, territories, and local governments to use Coronavirus Relief Fund payments until September 30, 2021 rather than the end of 2020. 

Regulatory Developments Relating to the Pandemic

Agencies Clarify Tax Treatment of Expenses Defrayed with PPP Loans

On November 18, the Treasury Department and Internal Revenue Service released guidance clarifying the tax treatment of business expenses where a Paycheck Protection Program (PPP) loan has not been forgiven by the end of the year in which the taxpayer received the loan. The agencies indicated that eligible expenses paid with PPP funds are not deductible because a business is not taxed on the proceeds of a forgiven PPP loan. This results in neither a tax benefit nor tax liability since the taxpayer has not paid anything out of pocket.  The agencies also indicated that if a business reasonably believes that a PPP loan will be forgiven in the future, expenses defrayed by the loan are not deductible, whether or not the business has filed for forgiveness.  In the case where the taxpayer expected a PPP loan to be forgiven, but it is not, the taxpayer can deduct those expenses.

Legislative Proposals

S. 4898: A bill to amend title VI of the Social Security Act to extend the period during which States, Indian Tribes, and local governments may use Coronavirus Relief Fund payments.

On November 17, Senators Lisa Murkowski (R-AK) and Maggie Hassan (D-NH) introduced legislation that would extend the period during which States, Indian Tribes, territories, and local governments can use Coronavirus Relief Fund payments under the CARES Act.  The legislation would allow relief funds to be used until September 30, 2021, rather than the original deadline of December 30, 2020. 

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