Part 22 – PPP/IRS Expense Deductibility

*Includes link to referenced Forbes article

On November 18, 2020, the Internal Revenue Service (IRS) issued Revenue Ruling 2020-27 (Ruling) which provides guidance on a taxpayers’ ability to deduct eligible expenses for Paycheck Protection Program (PPP) loan forgiveness.

Taxpayers that received a PPP loan and paid or incurred deductible expenses listed in section 1106(b) of the CARES Act, may not deduct those expenses in the 2020 taxable year if taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.

In conjunction with the Ruling, the IRS issued Revenue Procedure 2020-51 (Rev Proc), where there are safe harbors for taxpayers in the event forgiveness is denied, in whole or in part, or otherwise not requested that would allow for the deduction of expenses in either the 2020 or a subsequent tax year. These safe harbors are difficult to navigate and should be utilized cautiously.

We are advising that previous income tax estimates for 2020 should be recalculated to consider the loan forgiveness under Revenue Ruling 2020-27.

In addition, if you took a PPP loan to help sustain your business, it is likely you are aware of the bipartisan group of congressional leaders communicating with the Treasury department (Forbes article). There are three options you should consider as you prepare to file your tax return for 2020:

1) Take the deduction for PPP expenses and disclose it in your return.

  • Wait for IRS to review the disclosure and if the IRS upholds its view of the PPP expenses as nondeductible, you will owe the associated tax plus interest but no penalties.

2) Do not take the deduction for the PPP expenses on your return and file a separate protective claim seeking a refund.

  • If the IRS does not approve your protective claim refund, there are no penalties or interest.

3) File your return without taking the deduction for the PPP expenses and await further clarification through legislation or the IRS.

  • You will be able to file an amendment to your 2020 return to deduct the expenses.

We recommend option 2 or 3 depending on your businesses’ overall health, the outlook for 2021, and risk tolerance level. If you believe you may qualify for the safe harbors in Rev Proc 2020-51 or need assistance in determining which tax filing option best fits your situation, your BKM Sowan Horan team members are available if you need further assistance on this important development.