There has been considerable confusion regarding how expenses are to be treated for our clients who have received Paycheck Protection Program (PPP) loans, which are eligible for forgiveness under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Under the CARES Act, the forgiveness of a PPP loan is considered to be tax-exempt forgiveness of debt income. The PPP is eligible for forgiveness if the loan proceeds are used to pay for “covered expenses”:

• Employee payroll costs
• Utility costs
• Rent
• And mortgage interest that otherwise qualifies under Section 1106 of the CARES Act

Revenue Ruling 2020-27 Answers Question on PPP Loans

On April 30th, IRS caused a stir when they released Notice 2020-32, which specifies that any covered expenses paid with proceeds from a forgiven PPP loan will not be deductible for tax purposes.

This raised the following question: if a taxpayer is expecting the loan forgiveness at the end of tax year 2020 but forgiveness actually takes place in 2021, should the adjustment for tax purposes take place in 2020 or 2021?

Revenue Ruling 2020-27 released yesterday, provides the answer.

If a taxpayer has a reasonable expectation that a PPP loan will be forgiven, they may not deduct expenses paid or incurred with such proceeds in the year they are paid or incurred. In other words, if covered expenses are paid in 2020, they are not deductible on the 2020 tax return.

This is the case even if the application for forgiveness has not been submitted prior to the close of the year.

PPP Loan Forgiveness Exceptions

There is, however, an exception to this ruling, offered by Revenue Procedure 2020-51, which states that covered expenses are deductible on the return for the year paid if one of two things occurs:

1. The Taxpayer’s application for forgiveness is ultimately denied
2. The taxpayer decides, irrevocably, not to seek forgiveness for the loan

Whether Planning Your Tax Liabilities or Applying for Loan forgiveness. Let our Professionals Help.

In conclusion, these revenue procedures provide clarity and allow taxpayers to plan their tax liabilities accordingly. Please contact us if you have any questions. In addition, we are currently preparing and/or assisting clients with preparing Loan Forgiveness Forms, required supporting calculations, and related documentation. Let us know if you are interested in this service.