DC Tax Flash: IRS Instructs on Deducting Expenses by Businesses That Received PPP Loans
The Internal Revenue Service (IRS) today issued two pieces of guidance regarding loans issued under the Paycheck Protection Program (PPP) and certain deductions otherwise available to participating business.
"Since businesses are not taxed on the proceeds of a forgiven PPP loan, the expenses are not deductible," a Treasury Department press release explains. "This results in neither a tax benefit nor tax harm since the taxpayer has not paid anything out of pocket."
Where a PPP loan is not forgiven in the year received, today's guidance provides clarification of the tax treatment for business expenses. The IRS describes the guidance as follows:
- Revenue Procedure 2020-51 provides a safe harbor for certain PPP loan participants, whose loan forgiveness has been partially or fully denied, or who decide to forego requesting loan forgiveness, to claim a deduction for certain otherwise deductible eligible payments on (1) the taxpayer's timely filed, including extensions, original income tax return or information return, as applicable, for the 2020 taxable year, or (2) an amended return or an administrative adjustment request (AAR) under section 6227, as applicable. For taxpayers that decide to forego requesting loan forgiveness, the safe also allows these taxpayer to claim a deduction for the otherwise deductible eligible payments on an original income tax return or information return, as applicable, for the taxable year in which the taxpayer decides to forego requesting forgiveness
- Revenue Ruling 2020-27 provides guidance on whether a PPP loan participant that paid or incurred certain otherwise deductible expenses can deduct those 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 of the covered loan. The revenue ruling also provides guidance if, as of the end of the 2020 taxable year, the PPP loan participant has not applied for forgiveness, but intends to apply in the next taxable year.
"If a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not," the Treasury Department notes. "In the case where a PPP loan was expected to be forgiven, and it is not, businesses will be able to deduct those expenses."
In the Senate, several senior taxwriters, including Finance Committee Chairman Charles Grassley (R-IA) and Ranking Member Ron Wyden (D-OR), have argued that the IRS position on this issue conflicts with legislative intent. They support Sen. John Cornyn's (R-TX) bill that would make it clear that deductions for ordinary business expenses (and other tax attributes) are unaffected by PPP loan forgiveness. More than one-third of the Senate has cosponsored the legislation (S. 3612).
- Text of Revenue Procedure 2020-51
- Text of Revenue Ruling 2020-27
- Treasury Department press release on today's guidance
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