The IRS just released Revenue Procedure 2020-51 and Revenue Ruling 2020-27 related to the tax impact of loan forgiveness under the CARES Act’s Paycheck Protection Program (PPP). The combined guidance addresses the current uncertainty as to the timing of the disallowance of certain costs associated with loan forgiveness under the Paycheck Protection Program.
Rev Rul 2020-27
Revenue Ruling 2020-27 reinforces the disallowance of a deduction for covered expenses related to expenses reasonably expected to be forgiven under a PPP loan, regardless of when the taxpayer actually applies for forgiveness with their lending institution. This ruling amplifies Notice 2020-32, issued on April 30, 2020, which simply stated that PPP related expenses allocable to tax exempt forgiveness income are disallowed under IRC Section 265. The Notice also relied on authorities holding that deductions for otherwise deductible expenses are disallowed if the taxpayer receives reimbursement for such expenses. Revenue Ruling 2020-27 clarifies that for taxpayers that have incurred covered expenses during 2020 and that reasonably expect their PPP loan will be forgiven, such expenses are disallowed as deductions in the 2020 tax year.
The ruling provides two examples which clearly demonstrate that the timing of the forgiveness application and ultimate forgiveness approval does not alter the resulting 2020 tax deduction disallowance. The ruling concludes, that a taxpayer who received a covered loan guaranteed under the PPP and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the CARES Act may not 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 regardless of whether or not the taxpayer has submitted an application for forgiveness of the covered loan by the end of such taxable year.
Rev Proc 2020-51
Revenue Procedure 2020-51 provides a safe harbor that allows a taxpayer to claim a deduction either in the 2020 taxable year or in a subsequent taxable year, related to covered expenses under a PPP loan. If, in a subsequent year, the taxpayer’s request for forgiveness of the covered loan is denied, in whole or in part, or the taxpayer irrevocably decides not to request forgiveness for some or all of the covered loan.
This revenue procedure provides the process by which a taxpayer meeting the above criteria may apply the safe harbor. The taxpayer can either (1) simply deduct expenses related to the non-forgiven portion of the loan on a timely filed original or amended tax return for the 2020 taxable year OR (2) claim the applicable deductions in the subsequent taxable year on a timely filed return. In either case, a required disclosure statement should be attached to the applicable return to comply with this procedure.
We note that taxpayers may, but do not need to, use the safe harbor for deducting the expense in the subsequent tax year since that would be the result under general tax principles. Further, in applying the the revenue procedure, a taxpayer may not deduct an amount of eligible expenses in excess of the principal amount of the taxpayer’s covered loan for which forgiveness was denied or will no longer be sought.
As we approach year-end and year-end tax planning, it is important that you consider the impact of your PPP loan and related forgiveness associated with your overall tax position for 2020. Your Citrin Cooperman advisors are available to answer your questions and to help you navigate these ever-changing regulations and their impact on your business.