November 19, 2020 - On November 18, 2020, the IRS released additional guidance (Revenue Ruling 2020-27 and Revenue Procedure 2020-51) regarding the deductibility of expenses related to the Paycheck Protection Program when loan forgiveness is not granted or not yet applied for at the end of the tax year.
In April, the IRS released Notice 2020-32 providing that expenses attributable to loan forgiveness under the PPP program are not deductible for income tax purposes. Since that time, there have been a number of unanswered questions including what happens if forgiveness is not granted or not applied for at the end of the tax year. The IRS has now clarified its’ position and determined that a taxpayer may not deduct expenses paid or incurred during the year if the taxpayer meets all the other requirements of the PPP program and, at the end of the year, reasonably expects that the loan will be forgiven, regardless of the status of the loan application.
The IRS provided additional guidance, and a safe harbor, allowing the deductibility of expenses related to the PPP program to the extent loan forgiveness is denied or the taxpayer determines not to seek forgiveness on some or all of the loan.
There are still unanswered questions including the ordering rules related to nondeductible expenses that could potentially affect other areas of the tax law, including the calculation of tax credits like the R&D credit.
While the IRS position regarding the deductibility of expenses is becoming clearer, PPP borrowers should continue to monitor the situation carefully. As the IRS position treating the expenses as nondeductible is arguably against the intent of Congress, there will almost certainly be litigation on the issue. Furthermore, Congress could provide additional legislation regarding the treatment of the expenses and their intent.
We will continue to monitor the situation and provide additional insights as more information becomes available. In the meantime, we encourage you to reach out to your tax advisor to determine how this ruling may impact things such as 4th quarter tax estimates, extension payments, and other planning considerations.