IRS further clarifies deductibility of PPP loan expenses

New guidance this week by the IRS offers mixed results for borrowers who received Paycheck Protection Program loans.

Late Wednesday, the IRS released Rev. Rul. 2020-27, which reaffirms that taxpayers cannot deduct PPP-funded expenses in the year in which the expense was paid or incurred, regardless of whether the taxpayer has sought forgiveness on the loan.

This guidance directly addresses the deductibility of expenses related to PPP loans and offers two situations in which a taxpayer receives a PPP loan in 2020 and pays expenses (such as payroll, mortgage interest, and rent) that qualify as eligible expenses in the CARES Act:

  • In one situation listed, a taxpayer applies for forgiveness of the PPP loan (and was aware of the expenses that qualify) in November 2020 but has not been informed by the lender at the end of 2020 whether that loan will be forgiven.
  • In the second situation, the taxpayer has not applied for loan forgiveness by the end of 2020 but knew the number of expenses that qualify.

In both instances, according to the IRS, the taxpayer should have had a reasonable expectation of reimbursement in the form of loan forgiveness. Because of that, the deduction of expenses is not allowed.

Additionally, the IRS released Rev. Proc. 2020-51, which offers flexibility to deduct PPP-funded expenses for taxpayers who are denied or forego PPP forgiveness.

Under this safe harbor, a PPP borrower that has its loan forgiveness denied, in whole or in part, or forgoes seeking loan forgiveness can recover the deduction three ways:

  1. on the 2020 taxable year timely filed (including extensions) original income tax return
  2. through an amended 2020 taxable year income tax return or AAR adjustment, as applicable
  3. on the income tax return in a year subsequent to the 2020 taxable year

A statement titled Revenue Procedure 2020-51 Statement is required for the safe harbor should a borrower choose that option.

Nothing in the revenue procedure prevents the IRS from examining tax returns to determine whether the taxpayers qualify to deduct the expenses in question.

The procedure is effective for tax years beginning in 2020.

PPP regulations continue to evolve and could have an impact on your 2020 tax filing. To see how these changes might affect you, reach out to a KraftCPAs tax advisor.

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