A month after Congress created the Paycheck Protection Program (PPP) last spring and expressly provided that forgiveness of loans under the PPP should not result in taxable cancellation of indebtedness income for the recipients, the Internal Revenue Service (IRS) ignored the clear congressional intent by issuing a notice saying that the expenses funded by each such loan should become nondeductible the moment the loan is forgiven — thereby resulting in exactly the same net tax costs for loan recipients as would have been the case if Congress had not exempted the forgiveness of the loans from tax. In response, leaders on both sides of the aisle and in both houses of Congress declared that the IRS’s interpretation of the law was erroneous, and they inserted clarifying provisions into the next round of stimulus legislation to overturn the IRS’s wrongheaded ruling. Unfortunately, that badly needed further stimulus legislation has been stalled by massive partisan disagreements on major issues — albeit not on this one.

Roll forward six months to this past week. After receiving much criticism, the IRS national office has decided to double down on its misguided position. It issued Revenue Ruling 2020-27 this week saying that even if a taxpayer’s PPP loan has not yet been forgiven by the end of the taxable year, the taxpayer nonetheless loses any deductions for expenses funded by the loan during the year if the taxpayer reasonably expects to receive forgiveness of the loan in the following year.

The latest IRS salvo has deservedly drawn an immediate rebuke from the ranking Republican and Democratic members of the Senate Finance Committee. One hopes that ultimately the IRS’s position will be expressly overridden by Congress. In the absence of such a legislative fix, however, a taxpayer receiving a PPP loan will be left with the choice of complying with the IRS’s mistaken view of the law or taking the IRS to court.