The Consolidation Appropriations Act of 2021 overrules the IRS’s previous guidance (discussed here) holding that expenses giving rise to the forgiveness of Paycheck Protection Program loans were not deductible.

Background

The CARES Act established the PPP to help small businesses pay payroll costs and other eligible expenses during the COVID-19 emergency. Loan recipients can have their loans forgiven up to an amount equal to certain payroll, mortgage or rent, and utility expenses incurred between February 15, 2020 and December 31, 2020. The CARES Act excludes the amount of any such loan forgiveness from the borrower’s taxable income.

Although the CARES Act made PPP loan forgiveness tax-free, it did not indicate whether otherwise deductible expenses paid with PPP loan proceeds were still deductible.

Under IRS guidance issued in 2020, a taxpayer could not deduct otherwise deductible expenses paid with PPP loan proceeds if the taxpayer reasonably expected the loan to be forgiven.  

The CAA

The CAA overrules the IRS's denial of the deductibility of otherwise deductible expenses paid with PPP loan proceeds.

On January 6, 2021, in response to the CAA, the IRS and Treasury issued Revenue Ruling 2021-2, which reverses its previous guidance.