On November 18, 2020, the IRS issued guidance on the deductibility of PPP-funded expenses. Prior to this guidance, there was speculation as to whether eligible expenses would be non-deductible in the period they were incurred (i.e. the Borrower’s covered period) or be non-deductible in the period in which the SBA grants loan forgiveness. For many borrowers, those two time periods may span two tax years. With Revenue Ruling 2020-27 we now have an answer.
Revenue Ruling 2020-27 states “a taxpayer may not currently deduct expenses that were paid or incurred if those expenses were paid with PPP funds and the taxpayer reasonably expects that the loan will be forgiven, regardless of when the forgiveness application is filed.”
The revenue ruling provides two examples of a Borrower who received PPP funds in 2020 and has expenses to qualify for forgiveness also in 2020. In one case the Borrower applies for forgiveness prior to the end of 2020 but is not granted forgiveness and in the other the Borrower did not apply for forgiveness until 2021 but has satisfied the requirements for forgiveness in 2020. In both cases, the expenses are not allowed to be deducted during 2020.
What if I have a fiscal year end and my covered period spans two tax years?
The deductibility is tied to when the eligible expenses are incurred, therefore you may have non-deductible expenses in two different tax years. A borrower may shorten their covered period from the 24 week period but doing so will reduce the limits of employee and owner compensation allowable for forgiveness and preclude the use of certain safe harbors related to restoring employee counts and salary levels.
What if forgiveness is subsequently denied in full or in part?
On November 18, the IRS also issued Revenue Procedure 2020-51 which provides a safe harbor for taxpayers who expect to receive loan forgiveness but then forgiveness is later fully or partially denied. If loan forgiveness is not received, the associated expenses become deductible. The taxpayer may deduct the expenses on (1) a timely filed (including extensions) return, (2) an amended 2020 return, or (3) a timely filed subsequent year (2021) return. This safe harbor may be claimed by attaching a statement to the return. By allowing borrowers to include those deductible expenses in the subsequent tax year there will be less cost and administrative burden of filing an amended return.
Could PPP forgiveness expenses still be tax deductible?
The immediate reaction to the IRS guidance was relatively negative as many still believe the non-deductibility of the forgiveness expenses is contrary to the spirit of the CARES legislation: https://www.finance.senate.gov/chairmans-news/grassley-wyden-treasury-misses-the-mark-on-ppp-loan-expense-deductibility-guidance There is still hope legislation will pass to allow these expenses to be deducted; however, it is looking like that may not happen until well into 2021. We believe it will be a part of a stimulus package, if congressionally approved and signed by the President.
What should I do now?
We suggest reaching out to your Mitchell Wiggins team member now to ensure your estimated tax payments are adequate. If the final determination of the tax implications of PPP forgiveness does not happen until 2021, the answer for many borrowers may be to extend their return as long as possible. Please keep in mind, the extension of time to file is not an extension of time to pay taxes due