PPP Tax Deductibility

IRS Clarifies Tax Deductibility of PPP Expenses

Last week, the IRS and Treasury issued an update clarifying the tax treatment of expenses related to PPP loans. Borrowers that ‘reasonably believe’ their loan will be forgiven may not deduct PPP-related expenses in 2020 – regardless of whether they have actually filed for forgiveness yet.

Alternatively, in cases where borrowers expected loan forgiveness that did not materialize, expenses may be deducted

Rev. Rul. 2020-27
In reinforcing the IRS’ initial position on tax deductibility, the revenue ruling offers two scenarios in which the PPP borrower makes eligible payments with the loan funds.

  • In Scenario 1, the taxpayer understood the qualifying expenses and applied for forgiveness in November 2020, but has not yet received official word of forgiveness.
  • In Scenario 2, the taxpayer understood the exact amount of qualifying expenses paid, but has not yet applied for loan forgiveness.

In both scenarios, according to the IRS, the borrower has a reasonable expectation of forgiveness at the end of 2020, and thus, would not be eligible to deduct the loan-related expenses.

Rev. Proc. 2020-51
Via a new revenue procedure, the IRS issued safe harbor instructions for borrowers to claim a tax deduction for eligible expenses in circumstances when loan forgiveness has been partially or fully denied or the borrower decides not to apply for forgiveness.

In these circumstances, the borrower would be eligible to deduct all or a portion of expenses via:

  • a timely filed (including extensions) original tax or information return for the 2020 tax year,
  • an amended 2020 return or administrative adjustment request, or
  • a timely filed original tax or information return for the subsequent tax year.
MFA Observations
As we’ve seen over the course of the year with PPP-related guidance, there remains the possibility that future guidance could reverse or supersede these latest updates. We could see additional relief offered to PPP borrowers or legislation to allow the deductibility of forgiven expenses. We continue to monitor developments and will keep businesses informed as new information becomes available.

In the meantime, please don’t hesitate to connect with MFA’s PPP Advisory Team to help answer questions and/or assist with your loan forgiveness calculations.

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