IRS Issues Additional PPP Guidance on Timing: Expectation of Forgiveness Equals Nondeductible Expenses in 2020– November 20, 2020 by Adam Hill

After months of speculation about whether expenses related to Paycheck Protection Program (PPP) loans would be tax deductible in 2020, if in fact forgiveness is not approved until 2021, the IRS has provided an answer.

In April, Notice 2020-32 put the IRS’ position on deductibility of expenses paid with PPP loan proceeds on the record as non-deductible. Wednesday’s additional guidance, in Revenue Ruling 2020-27, stated that if your PPP loan is reasonably expected to be forgiven, expenses paid with the loan proceeds are not deductible on your 2020 tax returns.

The ruling takes us through two situations:

  • One in which a borrower pays valid PPP expenses (payroll, mortgage, etc.) and applies for forgiveness in November 2020 but does not receive that forgiveness by the end of 2020; and
  • One in which the same borrower does not plan to apply for forgiveness until 2021.

In both situations, the borrower cannot deduct expenses funded with PPP loans in 2020 because “each has a reasonable expectation of reimbursement” via forgiveness. The IRS intention with this notice is to avoid double taxation.

Revenue Procedure 2020-51 was also released alongside the ruling above to provide a safe harbor in the event a PPP loan is not fully forgiven or the PPP borrower decides they will no longer seek forgiveness. The Rev Proc states that a borrower may deduct eligible expenses, in the current or subsequent tax years, up to the amount of their unforgiven loan portion if a statement is attached to the return providing loan, expense and forgiveness details or the date the borrower decided they will no longer seek forgiveness.

It appears the majority of Congress disagrees with The Department of Treasury’s position; however, Congress has been unable to pass a legislative fix. Yesterday Senate Finance Committee Chairman Chuck Grassley (R-Iowa) and Ranking Member Ron Wyden (D-Ore.) released a joint statement regarding this deductibility issue. 

“Since the CARES Act, we’ve stressed that our intent was for small businesses receiving Paycheck Protection Program loans to receive the benefit of their deductions for ordinary and necessary business expenses. We explicitly included language in the CARES Act to ensure that PPP loan recipients whose loans are forgiven are not required to treat the loan proceeds as taxable income. As we’ve stated previously, Treasury’s approach in Notice 2020-32 effectively renders that provision meaningless.”

“Regrettably, Treasury has now doubled down on its position in new guidance that increases the tax burden on small businesses by accelerating their tax liability, all at a time when many businesses continue to struggle, and some are again beginning to close. Small businesses need help maintaining their cash flow, not more strains on it.”

“While we continue our efforts to clarify in any end-of-year legislation the intended relief in the CARES Act, we have an opportunity to provide meaningful relief to small businesses at this critical time. We encourage Treasury to reconsider its position on the deductibility of these expenses, and the timing of those deductions to provide relief to the small businesses that need it most.”

We believe, along with the AICPA, there is a high likelihood Congress could fix this issue in the next stimulus bill. However, that could not happen until February of next year, which leaves uncertainty for many taxpayers now. Loan recipients should reach out to their Cohen & Company service team to discuss this issue further during year-end tax planning.

Contact Adam Hill at ahill@cohencpa.com, Peter Myeroff pmyeroff@cohencpa.com or a member of your service team to discuss this topic further.


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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.