By: William A. Buck, Esq.
On November 18, 2020, the Internal Revenue Service (IRS) released further guidance regarding the deductibility of certain expenses paid with a loan secured through the Paycheck Protection Program (PPP). The Revenue Ruling can be found here: https://www.irs.gov/pub/irs-drop/rr-20-27.pdf
The CARES Act established the PPP, which provided that a recipient of a PPP loan can receive forgiveness of indebtedness on the PPP loan in an amount equal to the sum of payments for payroll costs and eligible nonpayroll costs. The CARES Act went on to address Federal income tax consequences of loan forgiveness to provide that any amount that would be includible in gross income of the borrower by reason of forgiveness of the loan is excluded from gross income.
In preliminary guidance, the IRS issued Notice 2020-32 providing that no deduction is allowed for an expense, which is otherwise deductible, if the payment of the expense (i.e. payroll costs and eligible non-payroll costs under the PPP) results in forgiveness of a PPP loan.
As we approach the end of the calendar year and borrowers await guidance on the application for loan forgiveness under the PPP, questions remain as to the IRS’s position for those borrowers that (i) have not yet received a determination from their lender or the SBA on the borrowers’ application for loan forgiveness, or (ii) have not yet applied for loan forgiveness under the PPP.
In Revenue Ruling 2020-27 issued on November 18, 2020, the IRS amplified its prior guidance in Notice 2020-32, providing that borrowers who paid otherwise deductible expenses (payroll costs and eligible non-payroll costs) with PPP loan proceeds may not deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of the taxable year, the borrower reasonably expects to receive forgiveness of the PPP loan on the basis that the expenses it paid or accrued during the covered period, even if the borrower has not submitted its application for forgiveness of the PPP loan.
Leech Tishman’s Taxation Practice Group has experience counseling companies and individuals on a wide range of taxation issues. If you have any questions about the Paycheck Protection Program or other tax issues, please contact William A. Buck.
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