On November 18, 2020, the IRS issued Revenue Ruling 2020-27 and Revenue Procedure 2020-51. The revenue ruling denies a deduction for PPP qualified forgiveness expenses if the taxpayer reasonably expects to receive forgiveness of the PPP loan regardless of whether the taxpayer has submitted a forgiveness application by the end of 2020. This pertains to expenses that qualify as eligible forgiveness expenses under the Cares Act (PPP-Forgiveness Application and FAQs) and paid during the covered period, including payroll costs, interest on a mortgage, rent payments and utility costs.
Though the IRS previously determined that no deduction is allowed for an eligible expense that is otherwise deductible if the payment of the eligible expense results in forgiveness of a covered loan (see Notice 2020-32 PPP – Tax Treatment of Wages and Other Qualifying Expenses Paid ), Rev. Rul. 2020-27 provides clarity, through two situational examples, on the treatment of expenses for taxpayers who have not yet received a forgiveness decision.
- Situation 1 involves a taxpayer who received a PPP loan, paid eligible expenses during the covered period, and applied for PPP forgiveness prior to December 31, 2020.
- Situation 2 involves a taxpayer who received a PPP loan and paid eligible expenses in 2020 but did not apply for forgiveness by December 31, 2020.
The ruling holds that taxpayers in both Situations 1 and 2 may not deduct the eligible expenses in 2020 on the basis that the taxpayers in both situations have “a reasonable expectation of reimbursement.” Furthermore, “the reimbursement, in the form of a covered loan forgiveness, was foreseeable.”
Rev. Proc. 2020-51 provides a safe harbor for eligible taxpayers to claim a deduction in the 2020 taxable year if their request for forgiveness is denied, in whole or in part, or if the taxpayers never request forgiveness for their PPP loans.
It is unknown yet how States will handle this IRS guidance. Additional consideration should be given to state tax authorities with respect to PPP guidance and related treatment of expenses.
Taxpayers should consider how this ruling may impact their business and consult with their TBC advisor about tax planning opportunities before year-end.