17 Dec PPP Loan Forgiveness: IRS Clarifies Tax Implications
The IRS recently issued Revenue Ruling 2020-27 to furnish additional guidance on the timing and the amount of non-deductible expenses paid with forgiven PPP Loan funds.
On November 18, 2020, the Department of Treasury issued more clarifications regarding the deductibility of expenses paid with PPP funds that are ultimately forgiven. The Revenue Ruling 2020-27 clarified that expenses will be non-deductible for Tax Year 2020 as long as the taxpayer “reasonably expects” that there will be debt forgiveness on the loan—even if forgiveness isn’t determined by the end of the year. In other words, because the expectation of forgiveness is reasonable, rather than unforeseeable, the deduction of expenses is considered inappropriate for 2020 tax returns.
Another common question: What if a taxpayer who expected to receive loan forgiveness in 2020 later finds out in 2021 that they were denied, and the loan wasn’t actually forgiven? This is where Revenue Procedure 2020-51 comes in. This revenue procedure sets forth a safe harbor, which allows the deduction of qualified expenses on a taxpayer’s 2020 or 2021 tax return in the event that the taxpayer had a reasonable expectation of loan forgiveness as of December 31, 2020 but subsequently learned that their request for loan forgiveness was denied.
The criteria to be eligible for safe harbor includes the following:
- The taxpayer must have paid or incurred eligible expenses in the 2020 tax year for which no deduction was permitted because, at the end of the 2020 tax year, the taxpayer reasonably expects to receive loan forgiveness.
- An application for PPP loan forgiveness is submitted before the end of the 2020, or at the end of the 2020 tax year the business intends to submit an application for PPP loan forgiveness in 2021.
- The PPP loan participant is notified by their lender in 2021 that forgiveness of all or part of their PPP loan is denied.
If a taxpayer intends to utilize the safe harbor procedures and deduct eligible expenses, the “Revenue Procedure 2020-51 statement” must be attached. This statement must include information as to why they are utilizing the safe harbor, the amount and date of the PPP loan, the amount of denied loan forgiveness and the amount of eligible expenses the taxpayer is deducting.
Many PPP lenders are now accepting applications for forgiveness. Please note that Congress may still make changes to this ruling as Senate Finance Committee chairman Chuck Grassley (R-IA) and ranking member Ron Wyden (D-OR) issued a bi-partisan statement calling on the Department of Treasury to reconsider this position.
Remember, Reconciled Solutions is here to help! Forgiveness application submission is not a simple task. We can assist you to ensure your application is accurate and that you put yourself in the best position to gain maximum loan forgiveness.
We’ll keep watch to see if Congress acts or IRS decides to reverse course, and, as always, we’ll share the news and our guidance accordingly.
