IRS Clarifies Position on Deductibility of Expenses Covered by PPP Loans
On Wednesday November 18th, the IRS released a Revenue Ruling and a Revenue Procedure which amplify its prior position in Notice 2020-32 that expenses funded with forgiven Paycheck Protection Program (“PPP”) loan funds are not deductible. In Revenue Ruling 2020-27, the IRS answered the question of whether a taxpayer who paid otherwise deductible expenses with PPP funds can deduct those expense in the taxable year in which the expenses were paid or incurred if, at the end of that taxable year, the taxpayer reasonably expects to receive forgiveness of the PPP loan. The answer according to the IRS is “no,” regardless of whether the taxpayer has submitted an application for forgiveness of the loan by the end of that taxable year.
The IRS provides two examples in the Revenue Ruling, including (i) a taxpayer pays valid expenses with PPP funds in 2020 and has a reasonable expectation of, qualifies for and applies for forgiveness of the PPP loan in 2020 but does not receive a final determination of whether the loan is forgiven by the time it files its 2020 tax return; and (ii) the same facts as in (i) except the taxpayer does not apply for forgiveness of the PPP loan until 2021. In both cases, the IRS takes the position that the expenses are not deductible by the taxpayer in 2020 because the taxpayer has a reasonable expectation of forgiveness at the end of 2020.
The IRS also issued guidance on the ability to deduct expenses where a PPP loan is not forgiven. In Revenue Procedure 2020-51, the IRS provides safe harbor rules for taxpayers who received a PPP loan, paid eligible expenses in 2020, and whose loan has not yet been forgiven at the end of the taxable year, but the taxpayer anticipates that it will be forgiven in the following year. The safe harbor rules and other guidance in the Revenue Procedure provide that a taxpayer may deduct some or all of the eligible expenses for the 2020 tax year where the PPP loan forgiveness is denied in whole or in part or the taxpayer subsequently does not apply for loan forgiveness. In those circumstances a taxpayer could deduct certain eligible expenses in 2020 that were covered by the PPP loan proceeds.
Based upon these rulings, it is prudent for all taxpayers who are seeking PPP loan forgiveness to understand whether or not, and when, it can deduct expenses incurred with the loan proceeds and the tax impact that may arise from the lack of deductibility if the loan is forgiven. For more information please contact any member of our Tax Group at KMK Law.