On Wednesday November 18, The IRS issued guidance (Rev. Rul. 2020-27) on how to treat expenses paid for by the PPP funds. Previously, it had been up in the air on whether the expenses paid for by PPP funds would be non-deductible in the year the expenses were incurred, 2020, or the year the PPP loan is forgiven, likely 2021 for most taxpayers.
We now have guidance on when these non-deductible expenses need to be reported. The Revenue Ruling states that if a business reasonably believes its PPP loan will be forgiven in the future, the expenses related to the loan will not be deductible in 2020, whether or not the business has filed for forgiveness.
The guidance provides two examples in the revenue ruling.
Examples:
The first example presents a taxpayer applying for forgiveness in the tax year qualifying expenses were incurred (2020) but not receiving notice of forgiveness until the subsequent tax year (2021).
The second example presents a taxpayer applying for forgiveness in the subsequent tax year (2021) for qualifying expenses incurred in the previous tax year (2020).
In both examples, the IRS indicated the taxpayers could not deduct expenses funded by the PPP loans because there was a reasonable expectation of forgiveness.
Rev. Proc 2020-51
The IRS also released a safe harbor rule (Rev. Proc 2020-51). The safe harbor allows taxpayers that reasonably believed their PPP loan would be forgiven in 2021 and did not deduct the associated expenses in 2020, but whose forgiveness is ultimately denied in 2021, to deduct the previously unallowed expenses in 2021.
Key Observations
The above guidance is subject to change. Congress’s initial intent was to allow taxpayers to deduct the qualifying expenses funded by PPP loans. Congress is working on provisions that would be included in the new stimulus package to override the IRS’s position on the deductibility of qualifying expenses funded by PPP loans. However, Congress is running out of time to pass a second stimulus package prior to the end of the year. The last day Congress is in session is December 11th.
Additional Guidance on the Way
We are monitoring developments and their implications closely and will provide additional updates as guidance is released.
Please do not hesitate to reach out if you have further questions. We can be reached at (513) 455-8200.