In May 2020, the IRS issued Notice 2020-32 which dealt with the deductibility of qualifying expenses (ie payroll taxes, mortgage interest, rent and utilities) in the context of a loan covered by the Paycheck Protection Program (“PPP”). The notice clarified that no deduction is allowed for an expense that is otherwise deductible if payment of the expense results in the forgiveness of the covered loan and the income associated with the forgiveness is excluded from gross income in accordance with the PPP. Many tax scholars have suggested that the phrase “results in forgiveness of the covered loan” in the Notice implied that the actual forgiveness must occur before qualifying expenses become non-deductible. On this basis, some PPP borrowers have been advised to deduct eligible expenses in the year the expenses were paid or incurred if they have not received a decision on the remission or have not requested. the discount before the end of that same year.
On November 18, 2020, the IRS published Rev. Rul. 2020-27 which confirms that a taxpayer who received a PPP loan and paid or incurred otherwise deductible qualifying expenses cannot deduct such expenses in the tax year in which the expenses were paid or incurred if, at the end of this tax year, the taxpayer “reasonably expectTo obtain forgiveness of the loan, even if the taxpayer did not apply for forgiveness at the end of that tax year. Unfortunately, Reverend Rul. 2020-27 does not provide guidance as to the “reasonably expected” standard. The ruling provides two scenarios to illustrate the IRS’s position. In both examples, the taxpayer receives a PPP loan in 2020, uses the loan to pay the qualifying expenses, and otherwise meets all other requirements for their PPP loan to be canceled. In the first scenario, the taxpayer requests the remission in November 2020 and in the second scenario, the taxpayer expects to claim the remission in 2021. The opinion concludes that the taxpayer in both scenarios is not allowed to deduct the remission. eligible expenses because the taxpayer has a reasonable expectation of forgiveness.
In collaboration with Reverend Rul. 2020-27, the IRS also released Rev. Proc. 2020-51 which offers two safe-haven options to allow a taxpayer who receives a PPP loan to deduct qualifying expenses if:
- Eligible expenses are paid or incurred in the 2020 tax year;
- The taxpayer receives a PPP loan which at the end of the 2020 tax year the taxpayer expects to be forgiven in a post 2020 tax year; and
- In a subsequent fiscal year, the taxpayer’s request for forgiveness is partially or totally refused or the taxpayer decides never to request forgiveness of the PPP loan.
Under the two safe-haven options, the taxpayer can deduct eligible expenses:
- on a timely original tax or information return (including extensions), as applicable, or an amended tax return for the 2020 tax year; Where
- on an original income tax or information return (including extensions) filed in a timely manner, as applicable, for the next tax year (i.e. 2021 tax year).
Taxpayers who choose to take advantage of the Safe Harbor procedures should include a statement with the relevant statement to provide certain details regarding their PPP loan, the amount of eligible expenses and the circumstances under which the loan was not canceled (i.e. that is, refusal or decision not to ask for forgiveness). A taxpayer may not deduct an amount of non-deducted eligible expenses greater than the principal amount of the PPP loan of the taxpayer for which the remission has been refused or will no longer be requested.
Reverend Rul’s show. 2020-32 provides important guidance for taxpayers who were waiting to file their P3 loan forgiveness request until tax year 2021 to obtain deductions for qualifying expenses in tax year 2020. Tips are also important for taxpayers who filed for a remission but were unsure of how to file their 2020 tax return. However, other questions remain, including the factors that a taxpayer should apply in determining whether the standard of ” the reasonable expectation of forgiveness ”has been met, as noted above. In addition, it is possible that bipartisan legislation from a new president and a new Congress will overturn the IRS position regarding the non-deductibility of qualifying expenses for taxpayers who receive a forgiveness of their PPP loan. .