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PPP paid expenses not deductible before forgiveness

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Babysitting and working at home The IRS has issued guidance (Rev. Rul. 2020-27) ruling that taxpayers cannot deduct expenses paid for with Paycheck Protection Program (PPP) loan proceeds if the taxpayer “reasonably expects” to receive forgiveness of the covered loan. This means the expenses would not be deductible in the current tax year, even if the year ends before the taxpayer has applied for or received forgiveness. The IRS issued concurrent guidance (Rev. Proc. 2020-51) providing a safe harbor allowing taxpayers to deduct the expenses in a taxable year beginning or ending in 2020 (2020 taxable year) if forgiveness is denied in whole or in part, or if the taxpayer decides never to request forgiveness.

Background The PPP, which was enacted as a part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, provides forgivable loans to certain businesses if they keep all of their employees on payroll for eight weeks and the funds are used to cover payroll costs, healthcare benefits, interest on a mortgage or other existing debt obligations, rent and utilities. The CARES Act explicitly provides that the debt forgiven under PPP is excluded from the business’s gross income.

In response to questions about the treatment of the expenses on which loan forgiveness is based, the IRS issued Notice 2020-32, which requires taxpayers to reduce their deductions by the amount of any loan proceeds that are forgiven under the PPP, because the debt forgiveness creates tax-exempt income. The IRS conclusion relies on Section 265, which denies deductions related to tax-exempt income.

Grant Thornton Insight: Because the IRS interpretation effectively eliminates the benefit Congress provided by excluding the debt forgiveness from gross income, Congressional leaders have pledged a legislative fix. The outlook for legislative relief appears promising, but the legislative process always involves uncertainty.
Rev. Rul. 2020-27 In Rev. Rul. 2020-27, the IRS analyzed two fact patterns to determine whether a taxpayer that received a PPP loan and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the CARES Act (which make the taxpayer eligible for forgiveness), may deduct those expenses in the taxable year in which the expenses were paid or incurred if at the end of that year, the taxpayer reasonably expects to receive forgiveness of the covered loan. In the first fact pattern, the calendar-year taxpayer who satisfied all the requirements under Section 1106 of the CARES Act applied for loan forgiveness before the end of the 2020 tax year, but was not informed by the lender of a decision whether the loan would be forgiven before the end of the year. In the second fact pattern, a calendar-year taxpayer that satisfied all the requirements under section 1106 of the CARES Act did not apply for loan forgiveness before the end of the 2020 tax year, but expects to in 2021.

In both situations, the IRS held that the taxpayers may not deduct those expenses in the taxable year in which the expenses were paid or incurred because the taxpayers reasonably expect to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period.

Rev. Proc. 2020-51 Rev. Proc. 2020-51 provides safe harbors allowing a taxpayer to claim a deduction in the taxpayer’s taxable year beginning or ending in 2020 (or in a subsequent taxable year) for certain otherwise deductible eligible expenses if these three conditions apply:

  • The eligible expenses are paid or incurred during the taxpayer’s 2020 taxable year
  • The taxpayer receives a loan guaranteed under the PPP, which at the end of the taxpayer’s 2020 taxable year the taxpayer expects to be forgiven in a taxable year after the 2020 taxable year
  • In a subsequent taxable year, the taxpayer’s request for forgiveness of the covered loan is denied, in whole or in part, or the taxpayer decides never to request forgiveness of the covered loan, as described in Section 3 of this revenue procedure.

For more information, contact:
David Auclair
National Managing Principal
Washington National Tax Office
Grant Thornton LLP
T +1 202 521 1515

John Suttora
Managing Director
Washington National Tax Office
Grant Thornton LLP
T +1 202 521 1523

Sharon Kay
Partner
Washington National Tax Office
Grant Thornton LLP
T +1 202 861 4140

To learn more visit gt.com/tax

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