Tax Treatment of Expenses Paid with PPP Loans – Part 2
On November 18, the IRS released supplemental guidance on the tax treatment of approved business expenses (e.g., payroll, rent, mortgage interest, and utilities) paid with monies that a taxpayer borrowed under the SBA’s PPP loan program. One of the attractive features of the PPP loan program was that if the borrower used the entire PPP loan to pay for approved business expenses, then the entire loan would be forgiven. CARES Act Sec. 1106(b).
Back in May, the IRS issued guidance that PPP loan forgiveness would be treated as a form of tax-exempt income. Notice 2020-32, 2020-21 IRB 837 (May 18, 2020). Under the IRS rationale, any approved business expenses paid with a PPP loan proceeds would be disallowed under Code Section 265(a)(1) as expenses associated with tax-exempt income.
Now that some taxpayers are beginning to seek lender approval of the PPP loan forgiveness, the IRS has issued supplemental guidance how taxpayers should follow Notice 2020-32 if they don’t receive lender approval of full PPP loan forgiveness by the end of the fiscal year (December 31 for calendar year taxpayers). Under Rev. Rul. 2020-27, taxpayers are supposed to assume that they will receive full PPP loan forgiveness even if they have not submitted a PPP loan forgiveness application to the lender or the lender has not approved the PPP loan forgiveness application by the end of the fiscal year. Thus, under the Ruling, taxpayers should reduce the normal tax deduction for approved business expenses in fiscal year 2020 by the amount of anticipated PPP loan forgiveness.
However, if the assumption of full forgiveness turns out to be incorrect, the IRS will permit the taxpayer a choice to claim the approved deductions associated with: (a) a portion of the PPP loan that was not forgiven or (b) that portion of the PPP loan that the taxpayer irrevocably determines not to seek forgiveness. The taxpayer may claim these “lost” tax deductions on an amended income tax return for fiscal year 2020, on an income tax return filed for fiscal year 2021. Rev. Proc. 2020-51, Sec. 4. To claim the benefits of Rev. 2020-51, the taxpayer will have to attach a required statement to the return where the otherwise disallowed expenses under Rev. Rul. 2020-27 are claimed. Rev. Proc. 2020-51, Sec. 4.04.