The Internal Revenue Service issued Revenue Ruling 2020-27 and Revenue Procedure 2020-51 on November 18th. Both provide guidance on the deductibility of PPP related expenses if borrowers have a “reasonable expectation” of receiving PPP loan forgiveness regardless of when the forgiveness application is submitted or when the SBA renders it’s forgiveness decision.
Following are the highlights of each:
Revenue Ruling 2020-27:
- Uses two situations to provide guidance; both presume a December 31, 2020 tax year-end and all qualifications for forgiveness have been satisfied.
- Situation 1 – Borrower applies for forgiveness prior to December 31, 2020 but is not informed of forgiveness until after its year-end.
- Situation 2 – Borrower applies for forgiveness after December 31, 2020.
- In both Situations, the borrowers have “a reasonable expectation” of forgiveness.
- In its analysis, the IRS states that if forgiveness “is reasonably expected to occur-rather than being unforeseeable,” the related 2020 expenses are not deductible.
Revenue Procedure 2020-51:
- Provides a safe harbor for deducting PPP related expenses incurred in a borrower’s taxable year beginning or ending in 2020 if:
- Loan forgiveness is subsequently denied (either all or in-part) after the borrower’s year-end or
- Borrower decides not to request forgiveness of the loan
- If the safe harbor applies, a borrower may deduct the unforgiven expenses on:
- A timely filed, including extensions, original 2020 tax return.
- An amended return for 2020.
- A timely filed, including extensions, original tax return for “the subsequent year.”
- The borrower must attach a statement to the return that deducts the PPP expenses for the safe harbor to apply.
Please be aware that there are currently additional stimulus bills in Congress that may overturn the IRS’s disallowance of the deductibility of PPP related expenses.
Cullari Carrico LLC remains committed to assisting our clients, friends and communities during these uncertain times and has a dedicated team in place that can assist with any questions you have related to this or other CARES Act programs. We invite you to contact us if you have questions or concerns.