On October 9, 2020, we sent out an e-Blast: SBA and Treasury Announce Simpler PPP Forgiveness for Loans of $50,000 or Less. In addition to this, we have been discussing with many clients that the message coming out of Washington DC was that expenses paid with PPP loans would still be deductible on your tax returns even though the monies used for these expenses had been paid with government funds.
This past week, however, the IRS released Revenue Ruling 2020-27 that reversed that line of thought and notified the public that any PPP loan that is forgiven in 2020 OR if you have reason to believe that any PPP loan will be forgiven in the future should be treated as an offset to the expenses that were paid with that loan (i.e. expenses will not be deductible).
While no one expects this to be addressed in Congress by the end of this year, there is still a possibility that this will be a priority in next year’s opening session. Because the possibility exists, our recommendation is twofold for those that have received PPP loans:
Do not file for loan forgiveness until this issue is resolved or you are required to do so by your lending institution. You have a lot more flexibility by waiting.
Plan on extending your return. Similar to #1 above, your flexibility is significantly increased if you have extended the filing of your return.
Below is our attempt to put in layman terms (if at all possible) the Revenue Ruling and Revenue Procedure as well as links to the official documents.
This ruling specifically addresses that expenses paid with forgiven or expected to be forgiven PPP loans are NOT deductible on the taxpayer’s tax return. In essence, any expense you pay or plan to pay with PPP loan monies are not deductible as an expense.
Subsequent to the release of Revenue Ruling 2020-27, the Service also provided some guidance with Revenue Procedure 2020-51. This procedure provides guidance for PPP loans that are or might be denied forgiveness in the current year or subsequent year OR the borrower does not ask for loan forgiveness. In this situation, the IRS provides several safe harbor options:
- Deduct the eligible PPP expenses that were denied forgiveness (or for which you will never seek forgiveness) on your original and timely filed (extensions included) 2020 tax return,
- If the 2020 Tax Return has already been filed, file an amended return/Administrative Adjustment Request to deduct those eligible PPP expenses, or
Deduct those eligible PPP expenses on your timely filed, original return for the subsequent tax year.
At this point, the most important thing to remember about this is that if these hold and are in effect for 2020 (translation – not retracted or changed), those that have 4th quarter tax deposits will need to increase accordingly. Additionally, remember that this is only at the federal level. While many states will follow federal law, other states will opt out. Our recommendation is that you “assume” all states will follow the IRS and increase your deposits accordingly.
As your Trusted Advisors, LCPA will continue to monitor this ever-changing development and keep you posted accordingly. In the interim, if you need assistance in calculating year-end tax deposits or have any questions relating to PPP loans, their forgiveness or anything else, please feel free to contact us.
If you have additional questions on this or any other service LCPA provides, please let us, your TRUSTED ADVISOR, know.