Reversal of IRS Position on the Taxation of Forgiven PPP Loans

January 7, 2021

On Wednesday, January 6, 2021, the Internal Revenue Service (“IRS”) confirmed that taxpayers can deduct otherwise deductible expenses paid for with proceeds of a loan from the Paycheck Protection Program (“PPP”) that was forgiven under that program. Revenue Ruling 2021-2 revokes the IRS’s prior position, published in Notice 2020-32, 2020-21 IRB, and amplified in Revenue Ruling 2020-27, 2020-50 IRB, that prohibited a taxpayer from deducting such expenses if the taxpayer expected the PPP loan to be forgiven. 

As noted in our previous client alert, “The CARES Act Giveth, the IRS Taketh Away . . .” dated May 5, 2020, Notice 2020-32 seemed to contradict the congressional intent, as expressed in the CARES Act, that the forgiveness of PPP loans not result in taxable income. The Consolidated Appropriations Act, 2021, signed into law on December 27, 2020, confirmed Congress’s intent that gross income does not include income from the forgiveness of PPP loans and that a taxpayer’s deductions, basis increases, or tax attributes may not be denied or reduced because they were funded by PPP loans that were forgiven. The Revenue Ruling conformed the IRS’s position to this clear congressional mandate.

For more information on this issue or other tax matters, please contact us.

Louis Tuchman at +1 212 592 1490 or [email protected]
Fred R. Green at +1 212 592 5910 or [email protected]

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