On November 18, 2020, the Internal Revenue Service issued Revenue Ruling 2020-27 which provides needed clarity on a taxpayers’ ability to deduct eligible expenses for Paycheck Protection Program (PPP) loan forgiveness.
The Ruling notes that a taxpayer that received a covered loan guaranteed under the PPP and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the CARES Act may not deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.
What if forgiveness is denied, in whole or part, or not requested?
In conjunction with the Ruling, the IRS issued Revenue Procedure 2020-51 to outline the steps for when:
1.) The eligible expenses are paid or incurred during the taxpayer’s 2020 taxable year,
2.) The taxpayer receives a covered loan guaranteed under the PPP, which at the end of the taxpayer’s 2020 taxable year the taxpayer expects to be forgiven in a subsequent taxable year, and
3.) In a subsequent taxable year, the taxpayer’s request for forgiveness of the covered loan is denied, in whole or in part, or the taxpayer decides never to request forgiveness of the covered loan.
The Rev Procedure provides for two safe harbors for taxpayers in the event forgiveness is denied, in whole or in part, or otherwise not requested that would allow for the deduction of expenses in either the 2020 or a subsequent tax year.
Questions we still have
While the Ruling provides information on the deductibility of expenses and the tactical approach for borrowers whose forgiveness is denied or not requested, additional clarification is still needed. This guidance does not address the order in which the eligible expenses (payroll, rent, utilities and mortgage interest) lose the ability to be deducted.
Further, the guidance does not address other matters that could have significant tax implications including, but not limited to, the impact on the following:
- Qualified business income deduction (Section 199A)
- Research and development credits
- Interest deduction limitation (Section 163(j))
Need Assistance in Choosing the Right PPP Loan Forgiveness Application?
We have put together a flowchart that can help: How to Select the Right Loan Forgiveness Application