Kati Sanford Goodner
As this is a fast moving topic, please note that this article is current as of 12/01/20. For contact information, please click here.
As most business owners big and small know, navigating the Paycheck Protection Program (PPP) loans and guidance has been an exercise in adaptability and has required weekly, if not daily, monitoring of updates from Congress, Treasury, the SBA, and the Internal Revenue Service. What started off as a program to help alleviate the woes of business owners in light of COVID-19 has turned into a labyrinth of questions and answers that generally lead to more questions as opposed to certainty.
One of the big issues that arose in the spring was the issuance of IRS Notice 2020-32, which provided that while income associated with the PPP loan forgiveness would be “excluded from gross income” pursuant to the CARES Act, any expenses paid using PPP loan proceeds would not be deductible by the Borrower even if such expenses would normally be deductible as Section 162 ordinary and necessary business expenses. You may remember the update we provided at the time which can be found below. Elected officials on both sides of the aisle expressed frustration that this stance adopted by the IRS went against the spirit of the CARES Act and PPP legislative intent, which was to help provide relief to small businesses. As we discussed on some of our Webinars, legislation was introduced in May (the Small Business Expense Protection Act of 2020) that would have legislatively overruled IRS Notice 2020-32 and allowed small businesses to deduct those expenses even if they were paid for using PPP loan proceeds that were ultimately forgiven. To date, the legislation hasn’t moved out of the Senate Finance Committee.
While many tax professionals expected a change to IRS Notice 2020-32 (either from Treasury directly or legislatively from Congress), few of us anticipated Revenue Ruling 2020-27, which was released on November 18th and that not only didn’t reverse the IRS’ position but created more confusion and subjectivity. Prior to Rev. Ruling 2020-27, many small businesses were waiting to apply for PPP Loan forgiveness until 2021 in order to kick the deductibility can down the road a bit longer, and which would have allowed them to go ahead and deduct the expenses in 2020 under the reasoning that the expenses hadn’t been forgiven yet and, therefore, were deductible. However, the recent Revenue Ruling provides that Borrowers cannot take a deduction for an eligible expense that is otherwise deductible “if, at the end of such taxable year, the 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.” So to summarize, if you received a PPP loan and you expect it to be forgiven because you’ve used the funds for covered expenses, it doesn’t matter when you file for forgiveness, you can’t deduct the expenses for 2020. Revenue Procedure 2020-51 provides additional guidance for Borrowers on how to file their returns and provides a safe harbor for Borrowers whose loans aren’t forgiven, either entirely or in part.
To the extent a silver lining exists, it is that 2020 tax returns will not be due until spring of 2021 and, for taxpayers filing under extension, fall of 2021. So time remains for Congress to act to legislatively override the IRS’ position on the deductibility of these PPP expenses. With a new administration coming into the White House and a Senate race still yet to be decided, we will continue to monitor any changes and keep you informed.
Recommended Reading – PPP Loan Usage and Deductions – Understanding IRS Notice 2020-32 and the current uncertainty surrounding the ability to deduct expenses paid from PPP loan funds