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Expectation Of Virus Loan Forgiveness Bars Deductions, IRS Says

By Theresa Schliep · 2020-11-19 16:21:32 -0500

While businesses whose Paycheck Protection Loans are not forgiven can deduct expenses they paid using the coronavirus financial aid, businesses that expect loan forgiveness cannot claim deductions for expenses covered by the funds, the Internal Revenue Service said.

Expenses covered using loans that are not forgiven, and that businesses consequently have to pay back, can be deducted from income for 2020 under a safe harbor the IRS provided in Rev. Proc. 2020-51, which it released on Wednesday. Specifically, businesses that receive the aid in their 2020 tax year and who expected it to be forgiven, but who did not receive or request loan forgiveness, can deduct the expenses on original or amended tax returns for the 2020 or 2021 tax years, the IRS said. 

However, businesses that have a "reasonable expectation" of loan forgiveness cannot claim deduction for expenses they paid for using the Paycheck Protection Program, or PPP, loans, the IRS said in Rev. Rul. 2020-27, which was also released on Wednesday. The agency in April announced that businesses could not deduct expenses covered by PPP loans, which were authorized by the Coronavirus Aid, Relief and Economic Security Act , saying that Internal Revenue Code Section 265 bars tax deductions for expenses paid for with forgiven loans.

--Editing by Vincent Sherry. 

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