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BHBM Tax Law Alert | IRS Clarifies Position on Deductibility of Expenses Covered by PPP Loans

Posted on by Baldwin, Haspel, Burke & Mayer


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IRS Issues Proposed Regulations on Carried Interest Rules

On November 18th 2020, the IRS released Revenue Ruling 2020-27 (the “Ruling”) and Revenue Procedure 2020-51 (the “Revenue Procedure”) which reinforce its prior position in Notice 2020-32 that expenses funded with forgiven Paycheck Protection Program (“PPP”) loan funds are not deductible.

In the Ruling, the IRS addresses the question of whether a taxpayer who paid otherwise deductible expenses with PPP funds can deduct those expense in the taxable year in which the expenses were paid or incurred if, at the end of that taxable year, the taxpayer reasonably expects to receive forgiveness of the PPP loan. The IRS provides two examples in the Ruling, including (i) a taxpayer that pays valid expenses with PPP funds in 2020 and has a reasonable expectation of, qualifies for, and applies for forgiveness of the PPP loan in 2020, but does not receive a final determination of whether the loan is forgiven by the time the taxpayer files its 2020 tax return; and (ii) the same facts as (i) except the taxpayer does not apply for forgiveness of the PPP loan until 2021. In both instances, the IRS takes the position that the expenses are not deductible by the taxpayer in 2020 because the taxpayer has a reasonable expectation of forgiveness at the end of 2020.

The Revenue Procedure provides guidance regarding the ability of a taxpayer to deduct expenses in the event a PPP loan is not forgiven. Specifically, the Revenue Procedure provides safe harbor rules for borrowers who do not apply for loan forgiveness, or who apply for forgiveness, but have the request denied in whole or in part in a subsequent tax year. In both cases, borrowers can deduct the relevant expenses on (i) a timely filed tax return for 2020 (including extensions), (ii) an amended tax return for 2020 or an administrative adjustment request for 2020 (as applicable), or (iii) a timely filed tax return for 2021 if a statement is filed with the 2021 tax return.

Taxpayers eligible for the safe harbor include those (i) who incur eligible expenses in 2020 and reasonably expect loan forgiveness at the end of 2020, (ii) apply for loan forgiveness in 2020 or intend to apply in 2021, and (iii) either (a) learn in 2021 that their loan forgiveness application has been denied in whole or in part, or (b) decide in 2021 not to seek loan forgiveness for some or all of their PPP loan.

If a taxpayer is eligible for the safe harbor and chooses not to deduct the expenses on an original or amended 2020 tax return, then it can deduct the expenses on its 2021 tax return if it attaches a statement to the return titled “Revenue Procedure 2020-51 Statement,” and includes the following information:

1. The taxpayer’s name, address, and social security number or employer identification number;

2. A statement specifying whether the taxpayer is an eligible taxpayer under the Revenue Procedure;

3. A statement that the taxpayer is applying section 4.01 (deductions claimed in 2020) or section 4.02 (deductions claimed in 2021) of the Revenue Procedure;

4. The amount and date of disbursement of the taxpayer’s covered loan;

5. The total amount of covered loan forgiveness that the taxpayer was denied or decided to no longer seek;

6. The date the taxpayer was denied or decided to no longer seek covered loan forgiveness; and

7. The total amount of eligible expenses and non-deducted eligible expenses that are reported on the return.

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The information contained within this newsletter does not constitute legal advice and is not intended to create an attorney-client relationship. You should consult an attorney for individual advice regarding your own particular situation.



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