IRS Rules No 2020 Deduction if PPP Forgiveness Reasonably Expected in 2021

December 15, 2020 Covid-19 Resource Center

On November 18, 2020, the IRS issued Rev. Rul. 2020-27, directing that a taxpayer that receives a PPP cannot deduct expenses paid for with a PPP loan in the year they were incurred if the taxpayer reasonably expects to receive forgiveness of the loan. In conjunction with this guidance, the IRS released Rev. Proc. 2020-51 which provides a safe harbor for later deducting these expenses if the loan is not ultimately forgiven.

Under Section 1106(b) of the CARES Act, an eligible recipient of a covered PPP loan can receive forgiveness in amount equal to the sum of payments made for the following expenses: (1) payroll costs; (2) mortgage interest; (3) rent and (4) covered utility payments. In May, the IRS issued Notice 2020-32, providing that a taxpayer is not permitted to deduct expenses that are normally deductible under the CODE to the extent the payment of such expenses results in loan forgiveness under the CARES Act.

Rev. Rul. 2027 addresses two situations. In both scenarios, the taxpayer uses PPP funds to pay otherwise deductible expenses and satisfies the forgiveness criteria.

  1. In Situation 1, the taxpayer applied for forgiveness by the end of 2020.
  2. In Situation 2, the taxpayer has not yet applied for forgiveness but expects to do so in 2021.

In both situations, the IRS ruled that the taxpayer cannot deduct the expenses because the taxpayer has a “reasonable expectation” that the PPP loan will be forgiven. Therefore, it has a reasonable expectation that the forgiveness of the PPP loan will be excluded from income and allowing a deduction would create a double tax benefit.

The IRS relies on Sec. 265(a)(1), which disallows a deduction for otherwise eligible expenses to the extent the payment of the eligible expenses is allocable to tax-exempt income in the form of reasonably expected loan forgiveness.

In Rev-Proc. 2020-51, the IRS issued safe harbor rules that permit a taxpayer to claim a deduction if the taxpayer received a PPP loan that it expects to be forgiven after the 2020 tax year and in a later year the taxpayer is ultimately denied loan forgiveness, in whole or in part, or if the taxpayer decides not to quest loan forgiveness. Under the safe harbor, the taxpayer can deduct some of all of the expenses on a

  1. Timely filed tax return (including extensions)
  2. An amended 2020 return or administrative adjustment request, or
  3. A timely filed return for the subsequent tax year.

To qualify for the safe harbor, taxpayers must attach a statement to their return titled “Revenue Procedure 2020-51 Statement” that contains the following information:

  • The taxpayer’s name, address, and Social Security number or employer identification number;
  • A statement specifying whether the taxpayer is an eligible taxpayer under either
    • Section 3.01 of the revenue procedure, for a taxpayer who applied for loan forgiveness in 2020 (or as of the end of the 2020 tax year intended to apply for loan forgiveness in a subsequent tax year) and the application was denied in whole or part,
    • Section 3.02, for a taxpayer who applied for loan forgiveness in 2020 (or as of the end of the 2020 tax year intended to apply for loan forgiveness in a subsequent tax year) but in a later tax year decides to irrevocably withdraw its request for forgiveness;
  • A statement that the taxpayer is applying the safe harbor in Section 4.01 of the revenue procedure for expenses claimed in 2020 or Section 4.02 for expenses claimed in a later year;
  • The amount and date of disbursement of the taxpayer’s loan;
  • The total amount of covered loan forgiveness that the taxpayer was denied or decided to no longer seek;
  • The date the taxpayer was denied or decided to no longer seek covered loan forgiveness; and
  • The total amount of eligible expenses and non-deducted eligible expenses that are reported on the return.