IRS Guidance Confirms: No Deduction of Expenses Used For PPP Loan Forgiveness
On April 30, 2020, Notice 2020-32 was issued, which stated that expenses paid for by Paycheck Protection Program (“PPP”) loan funds that are forgiven are not deductible for tax purposes.
Since the issuance of Notice 2020-32, many wondered 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 PPP loan forgiveness or has not yet applied for PPP loan forgiveness.
On November 18, 2020, Rev. Rul. 2020-27 was issued addressing that question. Rev. Rul. 2020-27 states that the deduction of eligible expenses used for PPP loan forgiveness is not appropriate if the taxpayer has a “reasonable expectation” of receiving loan forgiveness. This applies regardless of whether the taxpayer has applied for forgiveness or not, prior to their year-end.
Rev. Rul. 2020-27 provided two situations. In both situations, the borrower pays expenses that would qualify as eligible PPP expenditures and the borrower satisfies all of the requirements for the PPP loan to be forgiven. In the first situation, the borrower applies for forgiveness in November 2020 but has not received notice of forgiveness from the lender before the end of 2020. In the second situation, the borrower does not apply for forgiveness before the end of 2020, but rather expects to apply for PPP loan forgiveness in 2021. In both situations, Rev. Rul. 2020-27 explains that the taxpayer could not deduct expenses funded with the PPP loan because there was a “reasonable expectation” of forgiveness.
The IRS also issued Rev. Proc. 2020-51, which provides a safe harbor allowing a taxpayer to claim a deduction in the taxpayer’s taxable year beginning or ending in 2020 (“2020 taxable year”) for certain otherwise deductible eligible expenses, if: (1) the eligible expenses are paid or incurred during the taxpayer’s 2020 taxable year; (2) the taxpayer receives a PPP loan, which at the end of the taxpayer’s 2020 taxable year the taxpayer expects to be forgiven in a taxable year after the 2020 taxable year (“subsequent taxable year”); and (3) in a subsequent taxable year, the taxpayer’s request for forgiveness of the PPP loan is denied, in whole or in part, or the taxpayer decides never to request forgiveness of the PPP loan. The taxpayer may be able to deduct some or all of the eligible expenses on an original return, an amended return, or an administrative adjustment request. Taxpayers taking advantage of this safe harbor must attach a statement to their return on which the taxpayer deducts non-deducted eligible expenses. The statement must be titled “Revenue Procedure 2020-51 Statement” and must include specific information which is outlined in Rev. Proc. 2020-51 (a link to which is provided below).
Guidance documents issued by the IRS:
Rev. Rul. 2020-27 can be located here: https://www.irs.gov/pub/irs-drop/rr-20-27.pdf
Notice 2020-32 can be located here: https://www.irs.gov/pub/irs-drop/n-20-32.pdf
The Attorneys at Levene Gouldin & Thompson, LLP are available to provide advice and counsel concerning these new statutory obligations and other matters related to COVID-19.