Recently, the Internal Revenue Service issued two pieces of guidance—Revenue Procedure 2020-51 and Revenue Ruling 2020-27—reiterating its position that taxpayers cannot claim a deduction for any otherwise deductible expense if the payment of the expense results in forgiveness of a Paycheck Protection Program loan and clarifying the tax treatment for business expenses where a PPP loan is not forgiven in the year received. The IRS describes the guidance as follows:
- Revenue Procedure 2020-51 provides a safe harbor allowing a taxpayer to claim a deduction in the taxpayer’s 2020 tax year (or the subsequent year) for certain otherwise deductible eligible 2020 expenses if (1) the taxpayer incurred eligible PPP expenses in 2020 and, after applying for PPP loan forgiveness, the taxpayer is denied that forgiveness, in whole or in part, in a subsequent year or (2) the taxpayer decides not to request PPP loan forgiveness in a taxable year after 2020. In those situations, the taxpayer can deduct some or all of the expenses on (1) a timely filed (including extensions) original tax or information return for the 2020 tax year, (2) an amended 2020 return or administrative adjustment request, or (3) a timely filed original tax or information return for the subsequent tax year; and
- Revenue Ruling 2020-27 provides that a taxpayer that received a PPP loan and that paid or incurred certain otherwise deductible expenses cannot deduct those expenses in the tax year in which the expenses were paid or incurred if, at the end of that tax year, the taxpayer reasonably expects to receive forgiveness of the covered loan based on the otherwise deductible expenses. This includes situations where the taxpayer (1) has applied for loan forgiveness but has not been informed by the lender by the end of 2020 whether the loan will be forgiven and (2) has not applied for loan forgiveness by the end of 2020 but hassatisfied all requirements for forgiveness and knows the amount of expenses that qualify for loan forgiveness.
These two pieces of guidance follow IRS Notice 2020-32, released this past April, in which the IRS first announced that no deduction is allowed for anexpense if the payment of that expense results in forgiveness of a PPP loan.
Many disagree with the IRS’s position, in part because it obviates the “tax free” forgiveness of the loan. More than one-third of the United States Senate has cosponsored a bill that would make clear that deductions for ordinary business expenses (and other tax attributes) are unaffected by PPP loan forgiveness, but Congress has not enacted any clarifying legislation into law.
Christina J. Strasser is a corporate and tax attorney with Williams Parker in Sarasota and a member of the firm’s Business Solutions team. Christy holds an LLM in Taxation from the University of Florida College of Law and is a graduate of Florida State University of Law. Williams Parker’s Business Solutions team helps business owners and entities assess and manage risk, advise on employment, tax, and compliance issues, provide workout and turnaround guidance, and offer creditor, restructuring, and bankruptcy representation.