Yesterday, the IRS issued Revenue Procedure 2020-51 and Revenue Ruling 2020-27 pertaining to the deductibility of expenses paid for by paycheck protection funds.
In Revenue Ruling 2020-27, the IRS provides guidance on whether a Paycheck Protection Program (PPP) loan participant that paid or incurred certain otherwise deductible expenses can deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan. The revenue ruling also provides guidance if, as of the end of the 2020 taxable year, the PPP loan participant has not applied for forgiveness, but intends to apply in the next taxable year.
The ruling holds that expenses paid by a PPP loan (in which the participant expects to be forgiven) will not be deductible for tax purposes. The concept is that since the PPP amount forgiven is not taxable income, the related expenses paid by the PPP loan forgiven cannot be deducted. Eliminating deductions paid by PPP funds that were forgiven effectively increases taxable income. This must be factored in for your 2020 tax planning.
In Revenue Procedure 2020-51, the IRS outlines a safe harbor for deducting expenses paid by PPP funds. In the situation where a participant’s loan forgiveness has been partially or fully denied, or who decides to forego requesting loan forgiveness, the expenses paid by the amount not forgiven can be deducted on the 2020 original tax return or an amended 2020 tax return.
In both Revenue Ruling 2020-27 and Revenue Procedure 2020-51, the IRS is outlining long standing tax law pertaining to expenses paid by income that was not taxable. Any changes to taxation pertaining to PPP loan forgiveness requires legislation. Congress is aware of this issue and we will keep you informed if any legislative changes occur. In the meantime, if you have received PPP funds and intend to apply for forgiveness, we encourage you to factor in these developments in your 2020 tax planning.
We are available to assist you in estimating the tax impact of these developments. Please call the office to schedule an appointment.