New IRS Guidelines for PPP Loans

As we previously reported, the position of the Internal Revenue Service (IRS) is businesses that received Paycheck Protection Program (PPP) Loans cannot deduct expenses which were paid for with the loan proceeds. This past Wednesday, the IRS issued a Revenue Ruling and Revenue Procedure to provide additional guidance on this issue.

Revenue Ruling 2020-27 (Rev. Rul. 2020-27) addresses whether a taxpayer that received a PPP Loan and paid normally deductible expenses can still deduct those expenses if the taxpayer expects the loan to be forgiven in a later tax year. Rev. Rul. 2020-27 presents two different scenarios. In both scenarios, the taxpayer has paid expenses that are normally deductible as business expenses and are also covered costs eligible to be paid with PPP Loan funds.

• In Scenario 1, the taxpayer has satisfied the requirements for PPP Loan forgiveness and has applied for loan forgiveness in November 2020 but does not know when the loan will be forgiven.
• In Scenario 2, the taxpayer has satisfied the requirements for PPP Loan forgiveness but plans to apply for forgiveness in 2021. 

Under Code §1106(i) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, if any amount of the loan is forgiven, the taxpayer is not required to report this amount as gross income. In Notice 2020-32, the IRS stated that a taxpayer could not take a deduction for amounts paid for with PPP loan proceeds if those loans were going to be forgiven pursuant of §1106(i) and IRC §265(a)(1).

Based upon the previously mentioned Code sections and the tax benefit rule, the IRS reaffirmed its position that in Scenario 1 and 2, it would be improper for a taxpayer to take a deduction for amounts that were paid with PPP loan proceeds because there is a “reasonable expectation of reimbursement.”

Revenue Procedure 2020-51 creates a safe harbor for a taxpayer who had otherwise deductible business expenses, received a PPP Loan, and correctly did not take the business expense deduction, but had PPP Loan forgiveness denied in subsequent years. According to the IRS, a taxpayer may deduct non-deducted expenses on a 2020 tax return or may amend its 2020 tax return.

Alternatively, if a taxpayer is denied PPP Loan forgiveness in subsequent years, a taxpayer may choose to deduct non-deducted expenses in the year the PPP Loan forgiveness is denied. The deduction cannot exceed the principal amount of the PPP Loan or the amount that was denied forgiveness if only part of the PPP loan is forgiven. Revenue Procedure 2020-51 includes a Statement that must be attached to the taxpayer’s return if the safe harbor is being relied upon.