Rev. Rul. 2020-27 on PPP Loans and Taxes

On November 18, 2020, the U.S. Treasury Department and the Small Business Association (SBA) released Rev. Rul. 2020-27 that offers additional guidance on the tax treatment of expenses paid using Paycheck Protection Program (PPP) funds in the event the loan is not forgiven by the end of 2020. The IRS ruling concerning deductions for eligible PPP loan expenses is as follows:

(1) deny a deduction if the taxpayer has not yet applied for PPP loan forgiveness, but expects the loan to be forgiven; and

(2) provide a safe harbor for deducting expenses if PPP loan forgiveness is denied or the taxpayer does not apply for forgiveness.

The Treasury press release stated, “Since businesses are not taxed on the proceeds of a forgiven PPP loan, the expenses are not deductible. This results in neither a tax benefit nor tax harm since the taxpayer has not paid anything out of pocket.” Secretary Steve Mnuchin said, “These provisions ensure that all small businesses receiving PPP loans are treated fairly, and we continue to encourage borrowers to file for loan forgiveness as quickly as possible.”

While debt cancellation is ordinarily considered to be income, the PPP loan amount is nontaxable income. Borrowers may not deduct expenses paid with PPP funds (i.e. rent, mortgage interest, utilities) as that would be double-dipping. One of the most common questions is what if a borrower does not deduct expenses that ultimately end up not approved through loan forgiveness. Answer: It is possible to file an extension on 2020 taxes or file an amended income tax return once loan approval (or partial) has been authorized.

Additionally, the Treasury and IRS released Rev. Proc. 2020-51 this same day. This ruling provides a safe harbor for certain PPP loan participants, whose loan forgiveness has been partially or fully denied, or who decide to relinquish loan forgiveness, to claim a deduction for certain otherwise deductible eligible payments during the 2020 tax year.

Safe Harbor rules allow borrowers who decline loan forgiveness to claim a deduction for the otherwise deductible eligible payments on an original income tax return or information return, as applicable, for the taxable year in which the taxpayer decides to forego requesting forgiveness.

Mnuchin added, “Today’s guidance provides taxpayers with greater clarity and flexibility.”

 

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.

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