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.
Since May 2020 with the release of Notice 2020-32 we have known that expenses used to qualify for loan forgiveness would not be eligible tax deductible expenses. In other words, the payroll, mortgage interest, rent, and utilities expenses cannot be used as expenses for tax purposes, if those same expenses are used as eligible expenses for PPP loan forgiveness.
What was not known until recently was how we should treat those expenses if we had not received PPP loan forgiveness by 12/31/2020.
Rev. Rul. 2020-27
The IRS has just released Revenue Ruling 20-27 that answers that question.
If you have received loan forgiveness, or if loan forgiveness “is reasonably expected to occur”, you cannot deduct the related expenses in 2020. If the business has incurred all of the needed expenses before the end of the PPP covered period, they should “reasonably expect” that the PPP loan amount will be forgiven. Therefore, those related expenses will not be eligible tax deductions in 2020.
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.
Some examples:
Example One – If you have filed for loan forgiveness and have received information from the lender that you will have the PPP loan forgiven in 2020 or 2021, you should not deduct any of the related expenses in 2020.
Example Two – If you have filed for loan forgiveness and have not heard back from the lender, but you expect that the entire loan will be forgiven based on that application in either 2020 or 2021, you should not deduct any of the related expenses in 2020.
Example Three – If you do not file for loan forgiveness until 2021, but you expect that the entire loan will be forgiven based on that application in 2021, you should not deduct any of the related expenses in 2020.
Rev. Proc. 2020-51
If the business expects that all, or part of, the loan will not be forgiven, there is a Safe Harbor procedure that can be used to claim the unforgiven portion of those expenses on their 2020 income tax return. Revenue Procedure 20-51 outlines the specific steps that must be taken to claim these expenses.
The presumption is that all PPP loan amounts will be forgiven. There will be additional documentation required on the tax return in order to take expenses that were not forgiven for the PPP loan. Presumably, your tax software will allow you to produce the “Revenue Procedure 2020-51 Statement” that must be attached with the tax return and the specific items required to support the deduction.
Example Four– You have filed for PPP loan forgiveness and the lender has informed you that some or all of the loan will not be forgiven. You can deduct the expenses that were not used for forgiveness on your 2020 income tax return. You will need to document the reasons for this using Revenue Procedure 20-51.
Example Five – A business knows it will not be eligible for any PPP loan forgiveness and withdraws or will not apply for loan forgiveness by the due date. You can deduct the expenses that were not used for forgiveness on your 2020 income tax return. You will need to document the reasons for this using Revenue Procedure 20-51.
It will be important to let your clients know that they cannot deduct expenses used for PPP loan forgiveness, even if that forgiveness will not take place until 2021. This information will not just impact the 2020 income tax return but may also impact other parts of the business such as bonus structures or other tax planning strategies.
The Rev. Proc. provides two safe harbor options for eligible taxpayers:
- 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
- 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.
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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.
