In light of recent Congressional action, the IRS has obsoleted its prior guidance that deductions of business expenses taken by recipients of forgiven loans under the Paycheck Protection Program (PPP) are disallowed. On December 27, 2020, Congress passed the Consolidated Appropriations Act of 2021 (the CAA). The CAA funds the government until October 2021 and provides roughly $900 billion in coronavirus aid. Included in the aid is an additional $284 billion for a second round of PPP loans. Among other things, the CAA clarifies that otherwise deductible expenses paid for by a recipient of a PPP loan continue to be deductible even if the PPP loan is forgiven in accordance with the statute. This clarification applies to taxpayers that received PPP loans made under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) or under the CAA. On January 5, the IRS issued Revenue Ruling 2021-02 to obsolete Revenue Ruling 2020-27 and Revenue Procedure 2020-51, and reflect this statutory change.
Under the CARES Act, businesses were eligible to receive PPP loans to aid in maintaining employees throughout the economic crisis caused by the COVID-19 pandemic. If loan recipients abide by several requirements, then they are eligible for loan forgiveness. The CARES Act specifically provides that in any circumstances in which a PPP loan is forgiven, the taxpayer does not recognize cancelation of indebtedness income under section 108.1
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