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December 2, 2020

Frazer LLP
Tax Update - IRS Position on PPP Loan Forgiveness and Deductibility

December 2, 2020


We understand the complexity of the tax code and feelings of uncertainty when dealing with both PPP applications and PPP forgiveness. We recently received updated guidance on the IRS’s position regarding PPP funds and the potential effects on your bottom line.

On November 18, 2020, the IRS issued guidance and reiterated its position that taxpayers cannot
claim a deduction for qualified expenses paid with the PPP funds, even if the forgiveness has not
been granted prior to the end of the taxable year (Rev. Rul. 2020-27 and Rev. Proc. 2020-51). The IRS has included a “reasonable expectation” clause which places a burden on the taxpayer to determine if the loan will be forgiven. This appears to be the case even if you have not yet
applied for loan forgiveness by the end of the year.

Under Section 1106(b) of the CARES Act, the following expenses during the covered period beginning on the covered loan's origination date may be eligible for PPP forgiveness:

(1) payroll costs;
(2) any payment of interest on any covered mortgage obligation;
(3) any payment on any covered rent obligation; and
(4) any covered utility payment.

Essentially, the net impact of the recent IRS guidance at this time is that taxes are owed on the
forgiven portion of the PPP loan in the period funds are received through the denial of associated
deductions. There are groups that do not agree with this position and are lobbying against it
including the AICPA (American Institute of Certified Public Accountants). The AICPA believes that
the IRS’s interpretation denying deductions of expenses forgiven under the PPP is contrary to
Congress’s intent and has continually advocated for legislation that would clarify that the receipt
and forgiveness of assistance through the PPP does not affect the deductibility of ordinary
business expenses.

Please contact us here at Frazer if you have any questions or need any additional assistance.

Frazer, LLP


Please contact us if you have questions.  The Frazer team is ready to help in Brea (714.990.1040) or Visalia (559.732.4135)

Very truly yours,

Frazer, LLP




Frazer LLP | 135 S. State College Blvd., Brea, CA
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