IRS Clarifies Guidance on PPP Loan Forgiveness Deductions
With the end of 2020 rapidly approaching and recipients of U.S. Small Business Administration Paycheck Protection Program loans seeking to ensure maximum forgiveness, the IRS has issued clarifications for deductions of otherwise deductible expenses if PPP loan proceeds were used to pay the eligible expenses. Eligible expenses include:
- payroll costs,
- interest on a covered mortgage obligation,
- any covered rent obligation payment, and
- any covered utility payment.
No Deduction for Eligible Expenses on Forgiven PPP Loan
The IRS provided two situations under Revenue Ruling 2020-27, released November 18, where taxpayers are not allowed to deduct otherwise deductible expenses in a taxable year because there is reasonable expectation a PPP loan will be forgiven.
- Situation 1: Taxpayer A paid eligible expenses and applied for loan forgiveness in November 2020 but was not informed by the lender whether the loan will be forgiven before the end of 2020.
- Situation 2: Taxpayer B also had eligible expenses but did not apply for loan forgiveness before the end of 2020. Taxpayer B expects to apply for loan forgiveness in 2021.
In both Situation 1 and Situation 2, according to the IRS, taxpayers A and B each have a reasonable expectation of reimbursement. At the end of 2020, the reimbursement of A’s and B’s eligible expenses, in the form of covered loan forgiveness, is reasonably expected to occur – rather than being unforeseeable – such that a deduction is inappropriate. Accordingly, A’s and B’s eligible expenses are not deducible because there is a reasonable expectation of reimbursement.
Safe Harbor for Deduction of Eligible Expenses Non-Forgiven PPP Loan
Taxpayers are eligible for a safe harbor to take a deduction for eligible expenses that are paid or incurred during the 2020 taxable year if
- the eligible expenses are paid or incurred during the taxpayer’s 2020 taxable year,
- the taxpayer receives a PPP covered loan which at the end of the taxpayer’s 2020 taxable year the taxpayer expects to be forgiven in a taxable year after the 2020 taxable year, and
- the taxpayer’s request for PPP loan forgiveness is denied, in whole or part, or the taxpayer decides not to request forgiveness of the covered loan.
A qualifying taxpayer “may be able to deduct some or all of the eligible expenses on:
- the taxpayer’s timely filed, including extensions, original income tax return or information return, as applicable, for the 2020 taxable year;
- an amended return or an administrative adjustment request (AAR) under section 6227 of the Internal Revenue Code for the 2020 taxable year, as applicable; or
- the taxpayer’s timely filed, including extensions, original income tax return or information return, as applicable, for the subsequent taxable year.”
The IRS requires taxpayers to attach a statement to their 2020 return, or subsequent year, on which the eligible expense deductions are taken.
The AICPA believes the IRS contradicts Congress’ intent by denying deductions for eligible expenses and supports passage of additional legislation.
Ericksen Krentel continues to monitor the ever-changing guidance and requirements for the PPP loan forgiveness process to ensure you receive the maximum benefits. Our team is ready to help create a customized approach for your organization to effectively, and correctly, use those funds to guarantee maximum forgiveness.
If you received PPP funds and need assistance in allocation and forgiveness documentation or calculation, please contact us by clicking here.
As questions or concerns arise, we ask that you contact us so we can address them as quickly as possible to ensure we continue to meet your needs. As a reminder, you can always monitor our COVID-19 Updates webpage by clicking here for the latest or monitoring our accounts on LinkedIn, Twitter or Facebook.
About Ericksen Krentel
Ericksen Krentel CPAs and Consultants, founded in New Orleans, Louisiana in 1960 with offices in New Orleans and Mandeville, believes that serving as the clients’ most trusted adviser is grounded in going beyond the numbers.
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