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Rev. Rul. 2021-2: Deduction of eligible expenses allowable, PPP loan forgiveness

Deduction of eligible expenses allowable, PPP loan

The IRS today released an advance version of Rev. Rul. 2021-2 that implements a legislative change allowing taxpayers to deduct otherwise deductible expenses to the extent that the payment of such expenses results (or is expected to result) in the forgiveness of a loan guaranteed by the Paycheck Protection Program (PPP).

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Read Rev. Rul. 2021-2 [PDF 79 KB]

The PPP is one of two programs that provided financial support lending for small and large businesses pursuant to measures included in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (Pub. L. No. 116-136). The CARES Act provided for the forgiveness of covered loans and that any amount that otherwise would be includible in an eligible recipient’s gross income by reason of such forgiveness was excluded from gross income for federal income tax purposes.

The IRS in 2020 issued guidance (first Notice 2020-32 and then Rev. Rul. 2020-27) asserting that recipients of PPP loans should not deduct otherwise deductible expenses to the extent that the payment of the expenses results (or is expected to result) in the forgiveness of a PPP-guaranteed loan. In other words, these taxpayers were not to be allowed to deduct expenses that otherwise would be deductible if the payment of the expense was anticipated to result in forgiveness of a PPP loan pursuant to provisions of the CARES Act.

A provision of the Consolidated Appropriations Act, 2021 (Pub. L. No. 116-260) (enacted December 27, 2020) clarifies the treatment of the deduction of expenses and provides that no amount will be included in the gross income of the eligible PPP loan recipient by reason of forgiveness of indebtedness and that no deduction will be denied, no tax attribute will be reduced, and no basis increase will be denied by reason of the exclusion of the PPP loan proceeds from gross income. The legislative change is effective for tax years ending after March 27, 2020 (the date of enactment of the CARES Act).

Accordingly, today’s revenue ruling declares obsolete the guidance provided by Notice 2020-32 and Rev. Rul. 2020-27.

Read a related IRS release: IR-2021-4

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