By Amy E. Ebeling and Mary Ellen Schill
November 19, 2020
Through the release of a Revenue Ruling and a Revenue Procedure, the IRS re-affirmed its stance that taxpayers may not deduct payments for otherwise deductible business expenses (i.e., payroll, rent, covered utility payments, etc.) if those payments are made using Paycheck Protection Program (PPP) funds and the company “reasonably expects” to have their PPP loan forgiven. See IRS Rev. Rul. 2020-27. Notably, the IRS clarified that, for purposes of the 2020 taxable year, a taxpayer can have a reasonable expectation of PPP loan forgiveness even if they do not intend to apply for forgiveness until 2021. As long as the taxpayer “expects to apply” for forgiveness in the future, the IRS will consider the taxpayer to have a reasonable expectation that the PPP loan will ultimately be forgiven.
In an official statement of procedure accompanying Rev. Rul. 2020-27, the IRS provided a safe harbor. See IRS Rev. Proc. 2020-51. This safe harbor allows taxpayers who initially chose not to deduct their otherwise deductible expenses during the 2020 taxable year (because they paid for those expenses with PPP funds they reasonably expect to be forgiven) to later amend their return if the taxpayer ultimately: (1) decides not to apply for forgiveness; or (2) has their forgiveness application partially or fully denied. The procedures and statements that will need to be submitted in order to take advantage of the safe harbor are set forth in detail in Section 4 of the document.
As with most things PPP, this most recent guidance could either be altered or overturned if Congress chooses to intervene. For now, however, the IRS has made clear that businesses that are able to get their PPP loans forgiven will also not qualify for valuable tax deductions.
Thank you to Attorney Andrew Lorenz for his assistance in drafting this article.
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