Article

IRS Releases Much Anticipated PPP Deductions Guidance

On November 18, 2020, the IRS released Rev. Rul. 2020-27 and Rev. Proc. 2020-51 providing desperately needed guidance on the timing issues related to PPP loan forgiveness and the deductibility of the related PPP expenses.

Contact Us
< Back to Insights
Insights  <  IRS Releases Much Anticipated PPP Deductions Guidance

On November 18, 2020, the IRS released Rev. Rul. 2020-27 and Rev. Proc. 2020-51 providing desperately needed guidance on the timing issues related to PPP loan forgiveness and the deductibility of the related PPP expenses.

On November 18, 2020, the IRS released Rev. Rul. 2020-27 and Rev. Proc. 2020-51 providing desperately needed guidance on the timing issues related to Paycheck Protection Program (PPP) loan forgiveness and the deductibility of the related PPP expenses. For background on the IRS’s position regarding the nondeductibility of PPP expenses, see our article HERE.

Rev. Rul. 2020-27

In the guidance, the IRS confirms that a taxpayer may not deduct the PPP expenses (i.e., payroll costs, mortgage interest, utilities, rents) 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 on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.

The situations presented in the Revenue Ruling clarify that the above would apply regardless of whether the borrower actually submitted their forgiveness before the end of the year or even if they don’t expect to apply for forgiveness until 2021.

Prior to the release of this guidance, some tax professionals had been suggesting that if the borrower does not actually receive approval for forgiveness before the end of the tax year, the PPP expenses should be deductible in 2020. However, the IRS guidance is in line with blum’s expectations as to the position the IRS would take on this issue and the guidance clearly indicates that the nondeductibility would apply in tax year ending 2020, as long as—at the end of the tax year—the taxpayer reasonably expects to receive forgiveness of the PPP loan.

blum Insight #1

The IRS guidance does not provide much insight into the term “reasonably expects to receive forgiveness.” The two situations outlined by the IRS simply indicate that the borrower “satisfied all requirements under §1106 of the CARES Act for forgiveness of the covered loan.” However, the guidance does appear to differentiate between PPP loan forgiveness that is “reasonably expected to occur” vs. “unforeseeable.” blum will continue to analyze this distinction to determine whether there are situations where borrowers may be able to argue that the expectation of forgiveness is unforeseeable (including, where the taxpayer’s “economic need” for the PPP may be subject to review by the Small Business Administration).

blum Insight #2

The IRS’s position is that the actual filing of the forgiveness application will not change the timing of the nondeductibility of the PPP expenses if the borrower reasonably expects to receive forgiveness. Borrowers may have been purposefully delaying the filing of their forgiveness application hoping to push the nondeductibility issue into 2021. However, being that the IRS has expressed that the timing of the actual filing of the application is not determinative when the borrower reasonably expects forgiveness, such borrowers may want to consider accelerating the filing of the application if the borrower has any other reasons to do so.

Explore This

Paycheck Protection Program Loan Forgiveness Assistance

Learn More

Keep in mind that, for those borrowers who are subject to the business interest expense limitation or whose owners are eligible for the qualified business income deduction (the 20% deduction), it may still make sense to delay the filing of the application until the borrower’s 2020 overall tax situation is more clear. This is because there are potential tax strategies borrowers may want to consider in determining which expenses to include in the forgiveness application.

blum Insight #3

There is still hope for a bipartisan legislative fix from Congress to completely overrule the IRS position on this PPP expense non-deductibility issue (see our article HERE). But at this point, the IRS has made its position on the issue even more clear.

Rev. Proc. 2020-51

The IRS also released a safe harbor procedure under Rev. Proc. 2020-51 for “eligible taxpayers.” Eligible taxpayers include taxpayers who paid or incurred eligible PPP expenses during the 2020 taxable year, had “reasonably expected to receive forgiveness” at the end of the 2020 taxable year, but in the subsequent tax year either:

  • the borrower was notified by the lender that forgiveness of all or part of the covered loan is denied or
  • the borrower irrevocably decides not to seek forgiveness for some or all of the covered loan (for example, a taxpayer that determines that it will not qualify for covered loan forgiveness and withdraws the application submitted to the lender)

The Rev. Proc. provides two safe harbor options for eligible taxpayers:

  1. Deduct non-deducted eligible expenses on the taxpayer’s timely filed (including extensions) original income tax return or information return, as applicable, for the 2020 taxable year, or amended return/AAR for the 2020 taxable year OR
  2. Deduct the non-deducted eligible expenses on the taxpayer’s timely filed (including extensions) original income tax return or information return, as applicable, for the subsequent taxable year.

Taxpayers that choose to rely on either of the safe harbors must attach a statement to the return in which the “non-deducted eligible expenses” are deducted. The statement must be titled “Revenue Procedure 2020-51 Statement” and must include the following information:

  • The taxpayer’s name, address, and social security number or employer identification number;
  • A statement specifying whether the taxpayer is an eligible taxpayer under either section 3.01 or section 3.02 of Revenue Procedure 2020-51;
  • A statement that the taxpayer is applying section 4.01 or section 4.02 of Revenue Procedure 2020-51;
  • The amount and date of disbursement of the taxpayer’s covered loan;
  • The total amount of covered loan forgiveness that the taxpayer was denied or decided to no longer seek;
  • The date the taxpayer was denied or decided to no longer seek covered loan forgiveness; and
  • The total amount of eligible expenses and non-deducted eligible expenses that are reported on the return.

blum insight #4

The Rev. Proc. provides flexibility to borrowers who reasonably expect forgiveness at 12/31/2020 but, either due to an ultimate denial of forgiveness or a borrower’s irrevocable decision not to apply for forgiveness, do not actually receive the forgiveness in 2021. These borrowers can choose to deduct the PPP expenses in 2020 (on an original or amended return/AAR) OR in 2021 (the subsequent taxable year). This flexibility could be an important planning opportunity for these eligible taxpayers, especially considering the interplay with temporary tax changes made by the CARES Act (i.e., availability of NOL carrybacks for tax year 2020), as well as some taxpayers’ fears of increases to tax rates in the future.

 

Disclaimer:  The contents of this resource are for general informational purposes only. While every effort has been made to ensure its accuracy, the information is provided “as is” and no representations are made that the content is error-free. We have no obligation to update any content, comments or other information for retroactive or prospective interpretations or guidance provided by regulators, financial institutions or others. The information is not intended to constitute legal advice or replace the advice of a qualified professional. There are areas of the CARES Act where additional clarification from the Treasury Department and the SBA is needed. Your judgment and interpretation of the act may be needed. Users should consult with their legal counsel and representatives of the lending institution regarding the proper completion of their application and supporting documentation.

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

Continue the Conversation with Our Team
Get in touch with us.

Contact Us