IRS Releases New Guidance on the Deduction of PPP Expenses
Late Wednesday, the IRS released new guidance clarifying the tax treatment of certain expenses paid by taxpayers who have received a loan under the Paycheck Protection Program (PPP). This new guidance amplifies a prior IRS notice on this subject that has been the topic of much discussion and legislative effort to reverse the IRS’ position.
Under Section 1106(b) of the CARES Act, PPP loans may be forgiven to the extent of certain payments made by loan recipients during the covered period for payroll, mortgage interest, rent and utilities. Section 1106(i) of the CARES Act provides that PPP loan amounts that are forgiven will not result in taxable income for loan recipients. In May, the IRS released Notice 2022-32, stating their position that taxpayers receiving a PPP Loan would not be permitted to deduct expenses that would otherwise be deductible under the Code to the extent the payment of those expenses results in loan forgiveness under the CARES Act. Although bipartisan legislation has since been introduced to overrule the IRS’ position in Notice 2022-32, to date no such legislation has been passed.
In its latest guidance, Revenue Ruling 2020-27, the IRS confirms its prior position regarding the deductibility of PPP-related expenses, providing that taxpayers who received a PPP loan in 2020 but who either (i) have applied for forgiveness by the end of 2020 and have a reasonable expectation of forgiveness (based on the fact that the payment of its eligible expenses qualified for reimbursement) or (ii) have not yet applied for forgiveness by the end of 2020 but expect to do so in 2021 and, again, have a reasonable expectation of forgiveness, may not deduct those expenses. This ruling resolves any doubt over whether taxpayers could still deduct those expenses in 2020 if no approval of forgiveness is received by the end of the end of the year.
The IRS also released a parallel Revenue Procedure (2020-51) providing a safe harbor for taxpayers who meet either of the fact patterns described above and who either (i) are informed by the lender in a subsequent taxable year that the PPP forgiveness has been denied, or (ii) irrevocably decide not to apply for forgiveness of some or all of the loan in a subsequent year. Pursuant to the safe harbor, if certain information and taxpayer statements are provided with the relevant tax return, taxpayers meeting either of those fact patterns may deduct their eligible expenses on their original timely filed (including extensions) 2020 tax return, an amended 2020 tax return (or administrative adjustment request), or on the tax return for the subsequent tax year in which the taxpayer either learns that the loan was not forgiven or decides not to apply for forgiveness.