The recent IRS rulings of Revenue Procedure 2020-21 and Revenue Ruling 2020-27 may impact businesses’ ability to deduct the funds given under the Paycheck Protection Program (PPP), provided to create relief during the pandemic.
On November 18, the IRS remarked the businesses could not deduct expenses such as payroll and rent, paid for with money from the PPP loans provided under the Coronavirus Aid, Relief and Economic Security (CARES) Act. The mentioned deductions are standard when those expenses are paid for with revenue from running a business.
Rev. Rul. 2020-27
Revenue Ruling 2020-27 reiterates Notice 2020-32, issued on April 30, 2020, stating that taxpayers are not allowed to deduct expenses paid with proceeds of PPP loans if such loans are expected to be forgiven. The Notice also relied on authorities holding that deductions for otherwise deductible expenses are disallowed if the taxpayer receives reimbursement for such costs. Revenue Ruling 2020-27 clarifies that for taxpayers who have incurred covered expenses during 2020 and reasonably expect their PPP loan to be forgiven, such costs are disallowed as deductions in the 2020 tax year.
Rev. Proc. 2020-51
Revenue Procedure 2020-51 provides a safe harbor that allows a taxpayer to claim a deduction either in the 2020 taxable year or in a subsequent taxable year related to covered expenses under a PPP loan. If, in the following year, the taxpayer’s request for forgiveness of the covered loan is denied, in whole or in part, or the taxpayer irrevocably decides not to request forgiveness for some or all of the covered loan.
In the CARES Act, Congress intended recipients of forgiven PPP loans to deduct otherwise-deductible expenses associated with those loans for tax purposes. If the legislation is passed by Congress, small businesses would be stuck with a large PPP loan related tax bill.
The IRS has contradicted congressional intent. It has declared that borrowers who expect their PPP loan to be forgiven cannot deduct those expenses on their federal tax returns.
With the 2020 tax season upon us, businesses need to determine their tax position based on the financial impact of your PPP loan under this new forgiveness model. Contact the CDH team today to discuss how these regulations may impact you and to formulate a plan for your 2020 taxes.