IRS Confirms Tax Treatment of PPP Loan Related Expenses Where Forgiveness is Expected

Earlier this year, the IRS issued Notice 2020-32 which stated that expenses funded with a Paycheck Protection Program (PPP) loan that is forgiven are not deductible for tax purposes under rules designed to prevent a double tax benefit. 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 IRS issued Rev. Rul. 2020-27 answering that question: A taxpayer that receives a PPP loan and paid or incurred otherwise deductible expenses related to that loan may not deduct those expenses in the tax year those expenses were paid or incurred if, at the end of that tax year, the taxpayer reasonably expects to receive forgiveness of the PPP loan, even if the taxpayer has not submitted an application for forgiveness of the loan by the end of such tax year.

The IRS presented two scenarios in the revenue ruling as examples. In both scenarios, the borrower pays expenses such as payroll and mortgage interest that would qualify under the CARES Act as eligible PPP expenditures and the borrower satisfies all of the requirements for the loan to be forgiven. In the first scenario, the borrower applies for forgiveness in November 2020 but has not received notice of forgiveness by year-end. In the second scenario, the borrower does not plan to apply for forgiveness until 2021. In both cases, the IRS explained that the taxpayers could not deduct expenses funded with the PPP loans because there was a reasonable expectation of forgiveness.

The IRS also released Rev. Proc. 2020-51 to provide a safe harbor rule for PPP loan borrowers where the forgiveness has been denied in full or in part.  In such case, the taxpayer would be permitted (pursuant to the provisions in the Rev. Proc.) to take a tax deduction for those otherwise eligible expenses on an original return, an amended return, or an administrative adjustment request.

Rev. Rul. 2020-27 provides much-needed guidance to taxpayers that were considering delaying the filing of forgiveness applications in order to secure deductions in a current-year tax return or taxpayers that had filed a forgiveness application but were uncertain about how to file their tax returns.

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The information provided in this communication is of a general nature and should not be considered professional advice.  You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.