On November 18, 2020, the IRS released Rev. Rul. 2020-27 and Rev. Proc. 2020-51 providing desperately needed guidance on the timing issues related to Paycheck Protection Program (PPP) loan forgiveness and the deductibility of the related PPP expenses.
In the guidance, the IRS confirms that a taxpayer may not deduct the PPP expenses (i.e., payroll costs, mortgage interest, utilities, rents) 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.
The situations presented in the Revenue Ruling clarify that the above would apply regardless of whether the borrower actually submitted their forgiveness before the end of the year or even if they don’t expect to apply for forgiveness until 2021. According to the IRS, the taxpayer has a reasonable expectation of reimbursement (in the form of loan forgiveness) at the end of 2020; therefore, deduction of the expenses is inappropriate.
Revenue Procedure 2020-51 provides a safe harbor rule on when a taxpayer can deduct expenses funded with a PPP loan.
The safe harbor applies either if the SBA denies some or all of the loan forgiveness or if the taxpayer elects to not file for loan forgiveness. Under the safe harbor, if the taxpayer follows the reporting requirements in Section 4 of the revenue procedure, they can deduct otherwise allowable expenses up to the amount of PPP principal for which loan forgiveness was denied or not sought.
If the safe harbor does not apply, then in most cases, under Revenue Ruling 2020-27, the expenses will not be deductible in the year incurred.
The deductions will be allowed on any of the following:
- The taxpayer’s timely filed original return, including extensions, for the tax year in which the costs were paid or incurred.
- An amended return (or, in the case of certain partnerships, an Administrative Adjustment Request) for that tax year.
- The taxpayer’s timely filed original return, including extensions, for the subsequent year. The revenue procedure does not specifically allow or specifically forbid the deduction for the subsequent year to be taken on an amended return (or AAR) for that year.
The revenue procedure specifically covers the “2020 taxable year” and the “subsequent year.” It is reasonable to assume that the “2020 tax year” should be read to mean the tax year in which the PPP eligible costs were paid or incurred.
For now, this is the IRS’s most current interpretation of the CARES Act. Of course, it is subject to further acts of Congress. It is also a very real possibility that taxpayers will challenge these positions in Court.
If you have any questions about Revenue Procedure 2020-51, Revenue Ruling 2020-27 or your specific situation with regard to PPP loan forgiveness, contact Matt Miller or your Weston Hurd attorney.