In newly released formal guidance, the IRS has confirmed that taxpayers with a reasonable expectation of PPP loan forgiveness may not deduct expenses paid with those funds, even if the forgiveness has not been granted prior to the end of the taxable year. (Rev. Rul. 2020-27) In the guidance released today, the IRS states that because taxpayers calculate their forgiveness based on eligible expenses paid with PPP funds, the forgiveness of the loan amounts used for those expenses is reasonably expected to occur, and under IRC §265 taking the deductions would be inappropriate.
The IRS supplemented this guidance with additional guidance that states taxpayers who do not apply for forgiveness, or whose forgiveness requests are reduced or denied, may take deductions for expenses paid with the amounts that are not forgiven. (Rev. Proc. 2020-51)