IRS Issues Guidance Regarding the Deductibility of Expenses Paid for with PPP Loan Funds
December 10, 2020
By Robert J. Waine, Esquire
On November 18, 2020, the IRS issued Revenue Ruling 2020-27 and Revenue Procedure 2020-51, which clarify the deductibility of otherwise deductible expenses where the taxpayer reasonably expects to receive forgiveness of a PPP loan based in part on those expenses. Section 1106(i) of the CARES Act excludes from gross income any amount forgiven from a PPP loan. Revenue Ruling 2020-27 addresses the situation where the borrower pays the expense in 2020, but does not receive forgiveness of the PPP loan until 2021. Revenue Procedure 2020-51 provides a safe harbor for borrowers whose PPP loan is not forgiven, or who choose not to request loan forgiveness.
In Rev. Rul. 2020-27, the IRS addresses two situations: (1) where the borrower has incurred the expense and applied for PPP loan forgiveness in 2020, has not received forgiveness, but expects to receive loan forgiveness; and (2) where the borrower incurred the expense in 2020, but expects to apply for PPP loan forgiveness in 2021. Recognizing a line of authority that holds an otherwise allowable deduction is not allowed if there is a reasonable expectation of reimbursement, the IRS determined in both situations the expense is not deductible.
In Rev. Proc. 2020-51, the IRS provides safe-harbor rules for taxpayers who do not receive loan forgiveness for deductible expenses that were paid for with the proceeds of a PPP loan. The revenue procedure covers both the situation where an application for loan forgiveness is denied, in whole or part, and where the borrower decides not to seek loan forgiveness. In these situations the taxpayer can deduct the expense either in 2020 or in a subsequent taxable year. In order to claim the safe-harbor, the taxpayer must attach a statement titled “Revenue Procedure 2020-51 Statement” to the tax return. The statement must include, among other things: the amount and date of disbursement of the PPP loan; the total amount of covered loan forgiveness the taxpayer was denied or decided not to seek; the date the taxpayer was denied or decided not to seek loan forgiveness; and the total amount of eligible expenses and non-deducted eligible expenses that are reported on the return.
The IRS and the SBA are regularly issuing new requirements and guidance regarding the PPP program. If you are a PPP borrower and have questions about your PPP loan, the attorneys at Rothman Gordon P.C. are ready to assist. Please contact us online or call (412) 338-1169.