In guidance issued in late November, the IRS confirmed that taxpayers that received a Paycheck Protection Program (PPP) loan and that paid eligible expenses with proceeds from that loan cannot deduct those expenses in the tax year in which the expenses were paid if, at the end of that tax year, the taxpayer reasonably expects to receive forgiveness of the covered loan based on the otherwise deductible expenses.
The IRS ruling discusses two situations in which a taxpayer receives a PPP loan in 2020 and pays expenses, including payroll, mortgage interest, and rent, that are eligible expenses under the CARES Act. In one situation, the taxpayer applies for forgiveness of the PPP loan (and knew the amount of expenses that qualifies) in November 2020 but has not been informed by the lender at the end of 2020 whether the loan will be forgiven. In the second situation, the taxpayer has not applied for loan forgiveness by the end of 2020 but knew the amount of expenses that qualifies.
The IRS says in both situations, the taxpayer has a reasonable expectation of reimbursement (in the form of loan forgiveness) at the end of 2020; therefore, deduction of the expenses is inappropriate.
Safe harbor if loan is not forgiven
In separate guidance, the IRS issued safe-harbor rules that allow a taxpayer to claim a deduction in the taxpayer’s 2020 tax year for certain otherwise deductible eligible 2020 expenses if the taxpayer received a PPP loan that the taxpayer expects to be forgiven after its 2020 tax year and in a later year the taxpayer is denied PPP loan forgiveness, or the taxpayer decides not to request PPP loan forgiveness. In that situation, under the revenue procedure’s safe harbor, the taxpayer can deduct some or all of the expenses on a tax return, extension, or amended return.
How might this affect you?
Prior to this guidance from the IRS, there was considerable uncertainty regarding how PPP loan forgivness might affect a person’s tax situation, and whether PPP loan forgiveness should be pursued in 2020, or if forgiveness should be delayed until 2021. With this guidance, it is now clear that in many cases PPP loan recipients should pursue loan forgiveness immediately with the knowledge that the safe harbor is available in the event that loan forgiveness is denied.
If you or your business is the recipient of a PPP loan, contact our office so that we can look at your individual circumstances and evaluate how this new guidance affects your personal situation.