IRS Issues Guidance on Timing of Tax Deductions for PPP Expenses

While not the news borrowers were hoping for, on November 18, 2020, the Internal Revenue Service issued Rev. Rul. 2020-27 and Rev. Proc. 2020-51 to provide clarity in situations where the receipt of Paycheck Protection Program (PPP) loan proceeds and the SBA decision on PPP loan forgiveness occur in different years.  Both forms of the guidance discussed below are predicated upon the assumption that the borrower had a reasonable expectation to receive PPP loan forgiveness, irrespective of the year the PPP loan forgiveness decision is rendered.

Rev. Rul. 2020-27

  • Two scenarios are provided, one where loan forgiveness is applied for before year-end and one where loan forgiveness is applied for after year-end.
  • Both scenarios indicate that the borrower satisfied the conditions of Sec. 1106 of the CARES Act (i.e., the section of the CARES Act covering loan forgiveness).
  • In both scenarios it is the IRS’ position that the borrower may not deduct eligible expenses paid for with PPP funds.

Rev. Proc. 2020-51

  • Provides a safe harbor for taxpayers to deduct PPP expenses if the eligible expenses are paid or incurred during the 2020 taxable year and in a subsequent taxable year:
    • The taxpayer’s loan forgiveness request is denied; or
    • The taxpayer decides to withdraw the application for forgiveness.
  • If this situation applies, the taxpayer may be able to deduct expenses with the following:
    • Timely filed original 2020 return;
    • Amended return for administrative adjustment request; or
    • Timely filed return for the subsequent taxable year.

Borrowers should be reminded that that there is a bill sitting with the U.S. Senate that would allow for tax deductions for the expended PPP funds, potentially negating some or all of the impact of this guidance.

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