IRS Disallows 2020 Deduction for Expenses Paid Using Forgivable PPP Loan Funds11/24/2020
On April 30, 2020, the Internal Revenue Service (“the IRS”) released Notice 2020-32 regarding the deductibility of certain expenses relating to the Paycheck Protection Program (“PPP”). The Notice indicates that no deduction is allowed if the expense results in forgiveness of a covered loan under the PPP and the income associated with the forgiveness is excluded from gross income pursuant to the CARES Act.
This is a much-debated question since the issuance of that notice is whether a taxpayer that received a PPP loan and paid otherwise deductible expenses can deduct those expenses in the tax year in which the expenses were paid or incurred if, at the end of that tax year, the taxpayer has not received a determination of forgiveness of the loan or not yet applied for forgiveness.
On November 18, the Internal Revenue Service issued Revenue Ruling 2020-27 and Revenue Procedure 2020-51. This guidance provides clarity on the timing of the disallowance of deduction of eligible costs incurred during 2020 that were paid using proceeds from a loan guaranteed under the Paycheck Protection Program (PPP).
Revenue Ruling 2020-27: The IRS has determined that if a PPP borrower “reasonably expects” to have the PPP loan forgiven, the PPP borrower may not deduct eligible expenses in its 2020 taxable year. Revenue Ruling 2020-27 provides clarity that a reasonable expectation of forgiveness is likely present as follows:
- Regardless of whether or not the PPP borrower has filed its application for PPP loan forgiveness prior to the end of its tax year, and,
- Even if the PPP lender has not notified the PPP borrower of forgiveness prior to the end of its tax year.
Revenue Procedure 2020-51 – Safe Harbor:
Revenue Procedure 2020-51 provides a safe harbor allowing a PPP borrower to claim a deduction on its 2020 tax return related to these otherwise non-deducted eligible expenses if:
- The PPP borrower’s request for forgiveness is denied in whole or in part, or,
- The PPP borrower decides not to request forgiveness of its PPP loan.
If one of the two events above occurs subsequent to the end of the PPP borrower’s 2020 tax year, the expense deduction can be included on either a timely filed (including extensions) original income tax return for the 2020 tax year, an amended return for the 2020 tax year, or the PPP borrower’s timely filed 2021 original income tax return.
If a borrower uses the safe harbor to deduct the expenses on its 2020 originally filed or amended tax return, a statement titled “Revenue Procedure 2020-51 Statement” must accompany the return.
If you have any questions, or require further information regarding this notice, please contact Michael Ceschini at firstname.lastname@example.org.