On November 18th, the IRS issued additional guidance regarding deductibility of the Paycheck Protection Program (PPP) loan related expenses and the news is not what we had hoped for. The guidance came in the form of Revenue Ruling 2020-27 and Revenue Procedure 2020-51.
Revenue Ruling 2020-27 provides that if a business owner received a PPP loan and used those funds for expenses which are eligible for forgiveness, no deduction is allowed for those expenses in 2020. The IRS gives two examples, one in which the taxpayer had applied for loan forgiveness and one in which the taxpayer had not. In both cases, the funds were used for eligible expenses and also in each case, no deduction was allowed in 2020.
The fact that the taxpayer had not yet applied for the forgiveness, did not make those expenses deductible in 2020. The IRS' stance is, "if the taxpayer reasonably expects the loan to be forgiven" then there's no deduction for related expenses.
Revenue Procedure 2020-51 provides a "safe harbor" for taxpayers who file their return in 2020 reporting an incorrect amount of forgiveness or extend their return in 2020 and get a decision on forgiveness prior to filing their return.
Under the safe harbor rules, if the taxpayer receives notice that their forgiveness is disallowed, in whole or in part, before filing their 2020 tax return they can deduct those expenses on their return that were otherwise considered "non-deducted eligible expenses". Additionally, taxpayers that choose to forgo debt forgiveness are allowed a deduction for the expenses on their return provided all safe harbor guidelines are followed.
For taxpayers that file their 2020 return with nondeductible expenses and report the incorrect amount of forgiveness, the Revenue Procedure provides that the taxpayer may file a 2020 amended return or make an adjustment to their tax return for the year they are informed of the allowed forgiveness reflecting the adjustment of disallowance.
This guidance doesn't address how this impacts expenses for Schedule C filers, R&D credits, Wages for the Qualified Business Income Deduction, just to name a few. And we are still awaiting legislative action from Olympia as to whether or not PPP forgiveness will be subject to Washington State B&O Tax.
If you have any concerns regarding this topic, we are here to help. Contact our tax professional for more guidance.