Timing Isn’t Everything: PPP-Funded Expenses Remain Non-Deductible Whether or Not Loans are Forgiven by Year-End
On November 18, 2020, the IRS released Revenue Ruling 2020 – 27 and Revenue Procedure 2020 – 51, both of which provide guidance on the treatment of expenses paid with PPP loan proceeds. While this guidance is consistent with the IRS’s previous guidance prohibiting the deduction of expenses paid using Payroll Protection Program (“PPP”) loan proceeds that are subsequently forgiven, it does provide taxpayers with clarification on the treatment of PPP-funded expenses incurred in the tax year prior to the year in which the SBA confirms whether their loan will be forgiven. (You can read our summary of the previous IRS guidance on this topic here.)
Revenue Ruling 2020 – 27
Revenue Ruling 2020 – 27 contemplates two variations on a situation where a calendar year taxpayer receives a PPP loan in 2020 and uses those loan proceeds to pay expenses they believe to be eligible for reimbursement under the PPP. In the first variation, the taxpayer applies for forgiveness of their PPP loan in November of 2020, and is still awaiting confirmation of forgiveness from SBA on December 31, 2020. In the second variation, the taxpayer opts not to submit their application for loan forgiveness until sometime in 2021.
In analyzing both of these variations, the IRS reached the same determination. Since the taxpayer knew the amount of its eligible expenses qualifying for reimbursement, and had a reasonable expectation of reimbursement, forgiveness of their PPP loan was foreseeable and the expenses paid using PPP funds would not be deductible in 2020. For those who remain unpersuaded by this logic, the IRS also offered an alternative rationale for non-deductibility of these expenses, stating that Internal Revenue Code § 265(a)(1) disallows deductions for otherwise eligible expenses that are allocable to tax-exempt income in the form of reasonably expected covered loan forgiveness.
Revenue Procedure 2020 – 51
Having established that taxpayers are precluded from deducting expenses eligible for reimbursement if they know the amount of their eligible expenses and have a reasonable expectation of reimbursement, the IRS issued Revenue Ruling 2020 – 51 to address situations where a taxpayer foregoes a deduction for expenses that the SBA ultimately deems to be ineligible for reimbursement under the PPP, as well as situations where a taxpayer ultimately decides not to seek forgiveness for some or all of their PPP loan amount. If the year in which the taxpayer determines these expenses are non-deductible differs from the year in which the SBA makes that determination or the taxpayer opts not to apply for reimbursement of these expenses, the taxpayer has two choices. First, they could deduct the ineligible expenses on their timely-filed original income tax return or information return for the 2020 taxable year (as applicable), or amend their return or Administrative Adjustment Request (“AAR”) for the 2020 taxable year to pick up the additional deductions. Alternatively, they could decide to claim these deductions on their income tax return for the tax year in which the SBA determines the expenses were ineligible for reimbursement, or the tax year in which they decide to forego the opportunity to request reimbursement of these expenses.
Regardless of which option a taxpayer selects, they are required to notify the IRS of their intent to claim a deduction for ineligible expenses under this Revenue Procedure by submitting a statement with their return (cleverly titled the “Revenue Procedure 2020 – 51 Statement”) confirming the following:
- Their name, address, and Social Security Number or Employer Identification Number
- Whether the SBA has disallowed certain expenses the taxpayer believed were eligible for reimbursement, or whether the taxpayer simply opted to forego seeking forgiveness of certain eligible expenses
- Whether the taxpayer will include these additional deductions in their return for the year in which the expenses were incurred, or their return for the year in which they either received notice the expenses were ineligible for reimbursement or opted to forego requesting reimbursement for the expenses
- The amount and date of disbursement of the taxpayer’s PPP loan
- The total amount of PPP loan forgiveness that the taxpayer was denied or has decided to forego
- The date the taxpayer was denied or decided to forego loan forgiveness
- The total amount of eligible expenses and non-deducted eligible expenses reported on the taxpayer’s return
While the timing of a taxpayer’s recognition of previously non-deductible expenses under this Revenue Procedure does not change their character, taxpayers should still consider the impact that the timing of these deductions may have on their overall tax due. If a taxpayer’s income in the year the expenses are incurred is lower than their income in the year the expenses are determined to be deductible, it may be beneficial to claim the deductions on the return for the latter year in lieu of amending the prior year return.
As with many tax decisions, it is important to proactively consult with your tax advisor in order to determine the most beneficial course of action based on your particular tax attributes. If you would like to discuss this or any other tax planning technique with our team of tax advisors, you can contact them here.
DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.