By John Hsiao, CPA – Partner
November 30, 2020
On Novemhhttps://michaelsilver.com/john-hsiao/ttps://michaelsilver.com/john-hsiao/ber 18, 2020, the Internal Revenue Service doubled down on its position that businesses receiving PPP loan forgiveness cannot deduct the PPP-related expenses. Revenue Ruling 2020-27 addresses the timing of the non-deductibility of PPP related expenses.
According to this latest guidance from the IRS, a calendar year taxpayer that received a PPP loan to pay eligible expenses in 2020 may not deduct these expenses in 2020 if the taxpayer has a reasonable expectation of receiving PPP loan forgiveness. The IRS provided two examples in Revenue Ruling 2020-27:
- The taxpayer applied for loan forgiveness in November 2020 and expects that the loan will be forgiven. However, the forgiveness application had not been approved before the end of 2020.
- The taxpayer will not apply for the loan forgiveness until 2021. However, at the end of 2020, there is reasonable expectation by the taxpayer that the loan will be forgiven.
The IRS ruled that the taxpayer may not deduct its PPP-related expenses in 2020 under both examples. The IRS’ position is based on a current tax code that disallows a deduction for otherwise eligible expenses to the extent the payment of those eligible expenses is allocable to tax-exempt income (PPP forgiveness) in the form of reasonably expected covered (PPP) loan forgiveness. According to the IRS, the fact that the PPP loan forgiveness application may not have been approved or submitted by the end of 2020 does not change this result.
The IRS also provided a safe harbor procedure (Revenue Procedure 2020-51) for taxpayers whose PPP loan forgiveness application is ultimately partially or fully denied, or who decide to forgo requesting forgiveness, to deduct the eligible PPP expenses. The taxpayers can either claim the eligible deductions on their original or amended 2020 tax return, or on their original return for a subsequent tax year in which the loan forgiveness is denied.
Keep in mind that Congress may still intervene by passing another stimulus bill in the coming months that could include language allowing taxpayers to deduct eligible PPP-related expenses even if they receive PPP loan forgiveness. But until then, you should follow the current IRS guidance and not deduct eligible PPP-related expenses on your 2020 tax return to the extent forgiveness is expected. We recommend filing an extension of time to file your 2020 tax return to give Congress time to address this issue. It may also be more prudent to take a wait-and-see approach and hold off on applying for forgiveness until we know more.
We encourage you to consult with your MichaelSilver advisor and our CARES Act team for questions about this latest guidance from the IRS. We can be reached at 847.982.0333.