Anticipating the economic consequences of the COVID-19 pandemic, the Senate passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in late March. As a result of this passage, the Payment Protection Program (PPP) afforded a significant loan to small businesses. In its initial stipulation, Congress assured that, in addition to forgiving the principal amount of the loan for eligible expenses— payroll expenses and business mortgage interest, rent, and utility payments—made in 2020, the business’s gross income would exclude the forgiven amount. Though the Senate passed the PPP with the goal of aiding small business owners, the IRS effective nullified Congressional intent by ruling that expenses paid for with one’s PPP loan are not tax deductible.
The IRS and Deductions:
As codified in Revenue Ruling 2020-27, the IRS ruled on November 18th that those who expect, but have not yet received loan forgiveness by year-end are not allowed an income tax deduction for any expenses paid for using one’s PPP loan. The ruling states that if one paid for stipulated expenses with the government provision, he or she “may not deduct those expenses in the taxable year in which the expenses were paid” if he or she “reasonably expects to receive forgiveness of the loan.” This interpretation thus invalidates Congress’s intention to provide PPP loan proceeds to business owners on a tax neutral basis.
However, in the case that one’s PPP loan is not forgiven or he or she forgoes forgiveness, the IRS established safe harbor procedures to claim a tax deduction for expenses paid for with PPP loan money. As established in Revenue Procedure 2020-51, taxpayers who attach a statement entitled “Revenue Procedure 2020-51 Statement[i]” to a timely filed, including extensions, original 2020 return, amended 2020 return, or timely filed, including extensions, 2021 return, may deduct some or all eligible expenses.
A taxpayer is eligible for safe harbor if the taxpayer:
- Paid or incurred eligible expenses in the 2020 taxable year for which no deduction is permitted because the taxpayer reasonably expects to receive forgiveness on the PPP loan used to pay those expenses;
- Submitted an application for loan forgiveness before the end of the 2020 taxable year or, as of the end of the 2020 taxable year, intends to submit such an application in 2021; and
- Is subsequently denied, or does not request, PPP loan forgiveness in 2021.
The Future of the PPP:
Amid pressure from interest groups including the American Institute of CPAs, Congressional representatives on both sides of the aisle proposed a bi-partisan COVID relief package on December 1st that seeks to correct the tax treatment of PPP loans. The fate of this legislation remains to be seen. Of course, we are happy to discuss PPP considerations and more at any time. Please give us a call at 214-696-1922.
[i] For more information on what’s required in such a statement, see page 6 of the following document