On November 18, 2020, the IRS issued new guidance for taxpayers who participated in the Paycheck Protection Program (PPP) relating to deductible expenses. First, Revenue Ruling 2020-27 (which amplifies IRS Notice 2020-32 (May 18, 2020)), provides that a PPP loan borrower that paid or incurred certain otherwise deductible eligible expenses in 2020 qualifying it for loan forgiveness cannot deduct those expenses in the taxable year 2020 if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan. The Revenue Ruling makes clear that this is the result whether the application for forgiveness is filed in 2020 or 2021.
The ruling specifically relates to eligible expenses set forth under Section 1106(b) of the CARES Act, which generally include (1) payroll costs (including health insurance and retirement plan contributions), (2) any payment of interest on any covered mortgage obligation (not including any prepayment of or payment of principal on a covered mortgage obligation), (3) any payment on any covered rent obligation, and (4) any covered utility payment, up to the amount of the PPP loan proceeds.
Second, Revenue Procedure 2020-51 provides two safe harbors for deductions by PPP loan borrowers, whose loan forgiveness was reasonably expected to be forgiven as of December 31, 2020, but has been partially or fully denied forgiveness after 2020, or who decide to forego requesting loan forgiveness after 2020. These taxpayers may now claim a deduction for certain otherwise non-deductible eligible expenses from 2020 on (1) the taxpayer’s timely filed (including extensions) original tax return for the 2020 taxable year if it had not yet been filed, or (2) an amended return or an administrative adjustment request (AAR) under IRC section 6227 for the 2020 taxable year, as applicable. As an alternative safe harbor, these taxpayers may claim the deduction for the otherwise non-deductible eligible expenses on an original income tax return or information return, as applicable, for the year subsequent to 2020 when the denial or the decision to forego the forgiveness occurs. This would be the case even though the expenses were paid in 2020.
There is still a possibility that Congress will act to change the IRS rule and allow deduction of all eligible expenses when paid or incurred.
For Further Information: If you have any questions or require more information regarding this update or PPP loans in general, please contact one of our Tax Department Members John W. Schmehl, Esq., Matthew I. Whitehorn, Esq., or Stephanie S. Vogel, Esq.