SECTION 2. BACKGROUND

.01 Sections 1102 and 1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-93 (March 27, 2020), established the PPP as a new loan program administered by the U.S. Small Business Administration (SBA) as part of its section 7(a) Loan Program (15 U.S.C. 636(a)) that was designed to assist small businesses nationwide adversely impacted by the COVID–19 emergency to pay payroll costs and other eligible expenses. See Business Loan Program Temporary Changes; Paycheck Protection Program, 85 FR 20811 (April 15, 2020). Under the PPP, the SBA is permitted to guarantee the full principal amount of a covered loan, defined by section 1102(a)(2) of the CARES Act as a loan made under the PPP during the covered period; a covered loan may be forgiven under section 1106 of the CARES Act.

.02 The covered period for making covered loans refers to the period beginning on February 15, 2020, and ending on December 31, 2020 (covered period). The covered period initially was to end on June 30, 2020. See section 1102(a)(2) of the CARES Act. The Paycheck Protection Program Flexibility Act of 2020, Public Law 116-142, 134 Stat. 641 (June 5, 2020), extended the end date of the covered period to December 31, 2020.

.03 An individual or entity that is eligible to receive a covered loan (eligible recipient) can receive forgiveness of the full principal amount of the covered loan up to an amount equal to the following costs incurred and payments made during the covered period: (1) payroll costs, (2) interest on a covered mortgage obligation, (3) any covered rent obligation payment, and (4) any covered utility payment (eligible expenses). See section 1106(b) of the CARES Act.

.04 Under section 1106(i) of the CARES Act, for purposes of the Code, “any amount which (but for [section 1106(i)]) would be includible in gross income of the eligible recipient by reason of forgiveness described in section 1106 shall be excluded from gross in

come.” Section 1106(i) of the CARES Act excludes the amount from gross income regardless of whether the amount would be (1) income from the discharge of indebtedness under section 61(a)(11) of the Code, or (2) otherwise includible in gross income under section 61.

.05 Section 161 of the Code provides that, in computing taxable income under section 63 of the Code, certain deductions are allowed.

.06 Revenue Ruling 2020-27, 202050 IRB 1552 (Dec. 7, 2020), holds that a taxpayer computing taxable income on the basis of a calendar taxable year may not deduct eligible expenses in its 2020 taxable year if, at the end of the 2020 taxable year, the taxpayer has a reasonable expectation of reimbursement in the form of covered loan forgiveness on the basis of the eligible expenses it paid or accrued during the covered period ( citing Burnett v. Commissioner, 356 F. 2d 755 (5th Cir. 1966) cert. denied 385 U.S. 832 (1966); Canelo v. Commissioner, 53 T.C. 217, 225-226 (1969), aff’d 447 F.2d 484 (9th Cir.1971); Herrick v. Commissioner, 63 T.C. 562 (1975); Silverton v. Commission- er, T.C. Memo. 1977-198 (1977)). Revenue Ruling 2020-27 alternatively relies on section 265(a)(1) of the Code and §1.2651 of the Income Tax Regulations, which provide that no deduction is allowed for any amount otherwise allowable as a deduction to the extent the amount is allocable to one or more classes of income other than interest wholly exempt from the taxes imposed by subtitle A of the Code. See generally section 265(a)(1); §1.2651. This rule applies “whether or not any amount of income of that class or classes is received or accrued.” Id .