These both confirm and further provide additional guidance regarding the IRS’ notice 2020-32 issued in May, which informed us that:
PPP loans are to be excluded from income and no deduction is allowed for an eligible expense that is otherwise deductible if the payment of the eligible expense results in forgiveness of the covered loan. In other words, you get the benefit of the money, but you can’t deduct payments for expenses used in your forgiveness calculation. This effectively increases your net business income and resulting tax liability and has the same bottom line effect as if it was considered income on forgiveness of debt.
***The Rev. Rul.2020-27 further makes clear that even if forgiveness hasn’t happened, borrowers can’t deduct expenses paid for with PPP funds (in 2020) if they reasonably believe the loan will be forgiven (in 2021).
The Ruling gives two examples. In one, the taxpayer (designated as B) hasn’t applied for forgiveness by the end of 2020 (which will be the case for many of you out there) but has satisfied all of the requirements under the Coronavirus Aid, Relief and Economic Security Act (CARES Act) and expects to apply for forgiveness in 2021. The rule states “at the end of 2020 B both knew the amount of eligible expenses that qualified for reimbursement in the form of covered loan forgiveness and has a reasonable expectation of reimbursement.” Because that reimbursement of the loan was “foreseeable,” B may not deduct her eligible expenses.
The uncertainty surrounding the treatment of PPP loan expenses has been a source of controversy and much speculation and has resulted in various proposed new rules by legislators. It has been frustrating for almost everyone involved (borrowers, lenders, tax professionals, etc).
What we do know is that this is a game changer which will result in material tax liabilities that may not have been anticipated by borrowers.
S.J Gorowitz Accounting and Tax Services, P.C. is ready to help you understand what this may mean to your business and to help navigate complex tax issues of 2020.