In May the Internal Revenue Service caused a bit of an uproar when it issued Notice 2020-32. Though the CARES Act and the subsequent Paycheck Protection Program Flexibility Act had stated that any loans forgiven under the Paycheck Protection Program would be excluded from income, the IRC decided that any expenses paid with those forgiven loans must not be deducted. The perceived conflict between apparent legislative intent and the IRS’ notice left taxpayers in the lurch as to how to treat PPP loans on upcoming 2020 tax filings.
Though long rumored, Congress has so far failed to pass additional legislation to address this conflict. The IRS on the other hand doubled down on its position and issued Revenue Ruling 2020-27 and Revenue Procedure 2020-51. In those releases, the Service reiterated its authority for denying deductions for expenses paid with forgiven PPP loans (which they see as tax free grants) and explained how taxpayers should reflect those amounts when filing their 2020 tax returns.
Rev. Rul. 2020-27 describes two different situations. The first discusses a taxpayer that received a PPP loan during 2020, satisfied the requirements for loan forgiveness, and submitted an application for loan forgiveness before the end of 2020. The second situation is nearly identical, but for the fact that the borrower had yet to apply for forgiveness. In both scenarios, though loan forgiveness approval had yet to be finalized, the borrowers both expected their PPP loans would be forgiven. The Ruling concludes with the holding that any taxpayer that received a PPP loan may NOT deduct expenses paid or incurred with any amount of the loan the taxpayer reasonably expects will be forgiven. This holding applies to borrowers that applied for forgiveness during 2020, as well as borrowers that plan to apply for forgiveness at a later date.
Rev. Proc. 2020-51 goes on to describe taxpayers that reasonably expected to receive forgiveness, but were later denied by their lenders or irrevocably decided not to seek forgiveness for all or part of the loan. For those taxpayers that are denied loan forgiveness or decide not to pursue forgiveness, they are given three options on how to treat expenses paid with their PPP loans:
- Claim deductions on originally filed (including extensions) 2020 tax filings (should timing allow);
- Claim deductions on amended 2020 filings or administrative adjustment requests; or
- Claim deductions in the subsequent tax year during which the PPP loan forgiveness is denied.
To claim expenses under any of these methods, a taxpayer must attach to the filing a statement titled “Revenue Procedure 2020-51 Statement” that details the deduction method chosen and various specifics regarding the loan. The Rev. Proc. also states that any deductions claimed cannot exceed the principal of the original loan.
Though there is still time for Congress to weigh-in on how forgiven PPP loans will be reflected on tax filings, the IRS has clarified how taxpayers should proceed in the meantime. Due to the haste with which the PPP loan program was deployed there are still numerous questions that will need to be answered before taxpayers and tax preparers can be confident that their tax positions won’t be upended by future guidance. Another area of concern are the draft forms that are out concerning economic uncertainty substantiation. If you have any questions regarding the PPP loan program, forgiveness, or how the loans may affect other tax incentives, please feel free to contact Steve Miller at [email protected]
