November 20, 2020
As thousands of businesses and nonprofit organizations prepare and submit their Paycheck Protection Program (PPP) loan forgiveness applications, they may not be aware of recent IRS guidance regarding the tax treatment of expenses paid with PPP loans. PPP borrowers with pending forgiveness applications (filed or unfiled) should understand the recent guidance and factor nondeductible expenses into their tax planning for 2020.
New IRS Guidance
Following the signing of the CARES Act and creation of the PPP loan program, the IRS issued a notice to confirm that an existing law disallowing deductions funded by tax exempt income applies to the PPP loan program therefore making expenses paid with forgiven PPP loan proceeds nondeductible. However it was still unclear what impact the timing of the filing of the forgiveness application or the forgiveness decision had on the applicable 2020 expenses. Last week in Rev. Rule 2020-27 and Rev. Proc. 2020-51, the IRS clarified that PPP borrowers who have not yet received forgiveness but have “a reasonable expectation of reimbursement” as of the end of the tax year cannot deduct expenses paid for with the loan in 2020. For borrowers with denied or partially denied loans who want to claim deductions for otherwise eligible expenses in the current tax year, Rev. Proc. 2020-51 provides a safe harbor.
While Treasury is encouraging businesses to file for forgiveness now, many may be hesitant given the recent election and the changes in the White House and Congress. Whether you have received forgiveness or anticipate full or partial forgiveness later for a PPP loan, you should factor the tax treatment of expenses per the IRS’ most recent guidance into your 2020 tax planning. For assistance with PPP loan forgiveness and tax planning and preparation, contact Troy Turner, CPA, Director of Tax at firstname.lastname@example.org.
Troy Turner, CPA
Vice President, Director of Tax