Paycheck Protection Program (PPP) Expense Deductibility
You may be wondering if the expenses paid with PPP loan proceeds that are eligible for loan forgiveness will be deductible for tax purposes. What if your request for loan forgiveness is denied? And what if you ultimately decide never to seek forgiveness of the PPP loan? While there continues to be ongoing discussion for legislative change on this topic, on November 18, 2020, the IRS provided some updated guidance on those very questions based on the current tax laws.
Revenue Ruling 2020-27
The ruling deals with the question of whether the expenses eligible for PPP loan forgiveness are deductible. It expresses that if there are eligible expenses for forgiveness, and if forgiveness is reasonably expected, that the expenses are not deductible. This is the case even if you do not apply for forgiveness until 2021. The rationale is that the forgiveness of the loan is not included in taxable income and that the expenses are reimbursed. For example, if I pay out of pocket medical expenses and then later get reimbursed by my insurer for those expenses, they are no longer deductible as itemized expenses because they are no longer unreimbursed medical expenses. The same concept applies here that if the expense is reimbursed, you do not have a deductible expense.
Revenue Procedure 2020-51
The procedure deals with the worst-case scenario side of the PPP loan forgiveness questions – what if my forgiveness is denied? What if I do not end up seeking forgiveness?
The IRS provides several safe harbor options to address these concerns regarding any PPP loan amounts that are not forgiven:
- Deduct the eligible PPP expenses that were denied forgiveness (or for which you will never seek forgiveness) on your original and timely filed (extensions included) 2020 tax return,
- If the 2020 Tax Return has already been filed, file an amended return/Administrative Adjustment Request to deduct those eligible PPP expenses, or
- Deduct those eligible PPP expenses on your timely filed, original return for the subsequent tax year.
Ebenezer owns a business that obtained a PPP loan. He reasonably expects to qualify for PPP loan forgiveness when the business eventually completes the process of applying for forgiveness. Ebenezer files the 2020 tax return before applying for forgiveness and does not deduct the expenses (see the Rev. Ruling 2020-27 explanation). Unfortunately, Ebenezer’s application for forgiveness is denied and there is no reimbursement for the expenses paid with the PPP loan. Ebenezer can amend the 2020 tax return to deduct the expenses or claim them on the 2021 tax return.
Marley has a business with a PPP loan in 2020 and intends to apply for forgiveness of the loan in May 2021. He reasonably expects to receive PPP loan forgiveness. Marley files an extension in the Spring of 2021 for his 2020 tax return and decides he will repay the PPP loan and not request forgiveness after all. Marley can deduct the expenses on the 2020 original tax return.
It is crucial to note that using the safe harbor treatment of the unforgiven expenses in Rev. Proc 2020-51 is not a free pass to deduct the expenses and file the return quietly. The filer using safe harbor has a requirement to attach a “Revenue Procedure 2020-51 Statement” and include specific information laid out in their guidance.
As mentioned earlier, the non-deductibility of forgiven loan eligible expenses is all subject to legislative action which may occur at a later date. While there is potential for additional legislative action, we don’t know when that could be decided. If additional guidance has not been provided by the original filing due date, it is recommended to file for an extension of time to file. If you do not want to file an extension, make sure to discuss with your tax preparer the scenarios and additional steps that may be involved if a legislative change does happen after you have filed.
Please also be aware that the individual states may or may not follow the federal determinations. For example, North Carolina has already stated the forgiven loan eligible expenses will need to be added back if deducted on the federal tax return. Make sure you take a look at how the states you file in are each treating PPP loan eligible expenses to make sure you don’t run afoul of any of their specific rules.
We will be continually monitoring additional guidance and will provide updated information as it becomes available.
Please feel free to reach out to your BRC advisor with any questions you may have.