On November 18th, 2020, the Internal Revenue Service (IRS) issued additional guidance on Paycheck Protection Program (PPP) loans. Created in conjunction with the Treasury Department (Treasury), the guidance addresses the tax treatment of PPP expenses. More specifically, when a loan from the Small Business Administration’s PPP is not forgiven by the end of the year.
As part of the guidance, both agencies issued a revenue ruling and a revenue procedure. Overall, the guidance states that if businesses aren’t taxed on the proceeds of a forgiven PPP loan, expenses aren’t deductible. In some cases, a loan may have been initially considered as a candidate to be “forgiven,” but they eventually aren’t. Those businesses can deduct their PPP expenses. The additional guidance comes a couple months after the SBA released information on ownership changes and PPP loan forgiveness.
Revenue Procedure 2020-51 (Rev. Proc. 2020-51)
Rev. Proc. 2020-51 provides a safe harbor for PPP loan participants whose loan forgiveness has been partially or fully denied. It also allows participants who decide to forego loan forgiveness, to claim a deduction for certain otherwise deductible eligible payments:
- the taxpayer’s timely filed, original income tax return or information return, as applicable, for the 2020 taxable year; or
- an amended 2020 taxable year return or administrative adjustment request (AAR) under section 6227 of the Tax Code.
Revenue Ruling 2020-27 (Rev. Rul. 2020-27)
Rev. Rul. 2020-27 explains if a PPP loan participant that has paid certain otherwise deductible expenses can deduct those expenses. Those deductions, however, could only take place in the taxable year when borrowers paid or incurred expenses. The deductions could also only occur if the taxpayer reasonably expected to receive forgiveness of the covered loan. The ruling also includes guidance for participants not applying for forgiveness currently but intend to apply for tax year 2021.
The IRS and the Treasury also recently released guidance in Notice 2020-32 about deducting expenses for PPP loans. The notice clarifies that the following deductions are not allowed under the Tax Code:
- expenses that are otherwise deductible if the payment of the expense results in PPP forgiveness under the CARES Act; and
- when gross income does not include the income associated with PPP loan forgiveness.
Although the guidance seems to clarify the tax deducibility of PPP loan expenses, there are rules that participants should follow. The release of Rev. Proc. 2020-51, Rev. Rul. 2020-27, and Notice 2020-32 can help borrowers in calculating deductible expenses. If there are further questions, participants should contact their PPP loan lender for clarifications on possible tax deduction opportunities.