The IRS recently released additional guidance regarding certain tax implications associated with the PPP loan program.
A brief recap of some of the prior guidance that has been issued: The CARES Act specifically states that loan forgiveness under the PPP program will not be taxable. Unfortunately, shortly thereafter, the IRS issued Notice 2020-32, which states that no tax deduction is allowed for an expense that is otherwise deductible if the payment of the expense results in loan forgiveness under the PPP program. The result of the position taken by the IRS effectively negates any tax benefit of the taxable income exclusion contained within the CARES Act.
Under Revenue Ruling 2020-27, the IRS has taken the position that a taxpayer cannot deduct PPP expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness. This is true even if the taxpayer has not received forgiveness, or submitted an application for forgiveness, by the end of such taxable year. The result of this revenue ruling is that calendar year taxpayers will not be able to deduct PPP expenses on their 2020 tax return if they have a reasonable expectation that loan forgiveness will occur, regardless of whether loan forgiveness has actually occurred by the end of the year.
Revenue Procedure 2020-51 provides a safe harbor for PPP loan participants whose loan forgiveness has been partially or fully denied, or who decide to forego requesting loan forgiveness. Under this revenue procedure, taxpayers can deduct non-deducted eligible expenses on the taxpayers’ 2020 tax return, an amended 2020 tax return or for certain qualifying taxpayers in a subsequent taxable year.
One outstanding issue that is not addressed in the recent IRS guidance is related to self-employed individuals and general partners. For these borrowers, there are no PPP expenses associated with their owner compensation replacement amounts since such amounts are not otherwise deductible. It would therefore appear that these borrowers will receive favorable treatment in that they will receive tax-free loan forgiveness but will not have expense disallowance on the owner compensation replacement amounts attributable to PPP loan forgiveness since there are no deductions to disallow. We will wait to see if the IRS provides additional guidance on this issue, but at this time it may be advisable to maximize the expenses associated with these classes of individuals on the PPP loan forgiveness application.
This communication is intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.