The question everyone is asking is… Are the expenses reported for PPP forgiveness deductible if the taxpayer’s PPP loan is not forgiven by the end of the tax year? On November 18, 2020, the IRS released rulings related to deductibility of such expenses.
Rev. Rul. 2020-27 confirms and expands on the IRS guidance from Notice 2020-32 issued on May 1, 2020, that a taxpayer may not deduct any eligible PPP 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 forgiveness of the covered loan, even if the taxpayer has not submitted an application for forgiveness by the end of the tax year. However, the IRS guidance does not define what is considered reasonable expectation of forgiveness. CironeFriedberg suggests working with your tax professional to help guide you.
A taxpayer who applies for and receives forgiveness on a covered loan will be able to exclude the cancelled debt from gross income. However, the IRS has stipulated that taxpayers cannot deduct the expenses that are allocable to this tax free income, in this case the covered loan, that is either wholly excluded from gross income or wholly exempt from the taxes. This prevents a double tax benefit.
Rev. Proc. 2020-51 provides a safe harbor allowing taxpayers to claim a deduction for eligible PPP expenses for taxpayer’s whose request for forgiveness of the covered loan is denied or if the taxpayer decides to not request forgiveness of the covered loan. A taxpayer will be able to deduct any eligible expenses on (1) a timely filed (including extensions) original income tax return or information return, as applicable for the 2020 tax year, (2) amended return or Administrative Adjustment Request (AAR) for the 2020 tax year, or (3) a timely filed (including extensions) original income tax return or information return, as applicable for the subsequent tax year.
There is a potential bipartisan legislative fix pending from Congress to completely overrule the IRS position on this PPP expense non-deductibility issue. This is expected to be included in the next COVID-19 relief bill. However, at this point the IRS has clarified its position on the issue.
If you need assistance or have any questions related to PPP loan forgiveness and deductibility of expenses, please contact your CironeFriedberg professional. You can reach us by phone at 203-798-2721 (Bethel), 203-366-5876 (Shelton), or 203-359-1100 (Stamford), or email us at email@example.com