As was widely reported back in May, the Internal Revenue Service (IRS) issued Notice 2020-32, in which it determined that 2020 expenses which have been paid using Paycheck Protection Program (PPP) loan proceeds will be nondeductible to the extent those loans are subsequently forgiven. Since that forgiveness may not be granted until sometime in 2021, this raises the question of how to determine the allowable deductions to report on 2020 returns which may be filed before the forgiven amount, if any, is known.
The Internal Revenue Service has just released additional guidance to answer that question for taxpayers who are anticipating full or partial forgiveness of their (PPP) loans.
Revenue Ruling 2020-27, issued on November 18th, limits taxpayers’ deductions of expenses funded with PPP loan proceeds to only those amounts which, as of the last day of the tax year (December 31st for calendar-year taxpayers), are reasonably expected NOT to be forgiven.
Revenue Procedure 2020-51, which was issued on the same day will allow taxpayers whose requests for loan forgiveness are unexpectedly denied or limited after the close of the tax year the choice of whether to claim the related expenses on either an original or amended 2020 return or an original 2021 tax return. In addition, taxpayers who in 2020 expected to apply for and receive forgiveness but make an irrevocable decision in 2021 not to apply for forgiveness, will be allowed the same choice.
As taxpayers and their advisors prepare to incorporate these provisions into their year-end planning, future events may still render them moot. Bills with bipartisan support have been introduced in both the Senate and House which would clarify congressional intent that ordinary business expenses paid with forgiven PPP loans are deductible. Only time will tell whether that “fix” will take the day.
At this point we are monitoring the situation daily and some believe Congress may act before 12/11/2020 before federal funding runs out. We feel that year end planning is critical and final planning should be delayed until mid-December.
As usual, please contact your E. Cohen advisor if you have any questions about the information above.