The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act established the Paycheck Protection Program (“PPP”) that provided loan funding for qualifying small businesses. Under the CARES Act, a PPP loan may be forgiven if the borrower uses the proceeds to pay specified expenses (including payroll costs, interest on qualified mortgage indebtedness, rent under a qualified lease contract, and qualified utilities) during a qualifying payment period beginning on the loan date. The amount of forgiven PPP indebtedness is excludible from gross income for Federal income tax purposes.
On April 30, 2020, the IRS issued Notice 2020-32 which provided that a taxpayer may not claim a deduction for otherwise deductible expenses that are paid with forgiven PPP loan proceeds. (See Whitley Penn Tax Alert: Deductibility of Expenses Funded with PPP Loan Proceeds dated May 1, 2020). Last week, the IRS issued additional guidance regarding the treatment of expenses paid from PPP loan proceeds.
In Revenue Ruling 2020-27, the IRS held that a taxpayer may not claim a tax deduction in 2020 for expenses paid from PPP loan proceeds if there is a reasonable expectation at the end of 2020 that the loan will be forgiven in a subsequent tax year. This rule applies when the taxpayer has submitted its forgiveness application by the end of 2020 but has not received official notification of forgiveness from the lender. The rule also applies if the taxpayer has not submitted its forgiveness application by the end of 2020 but still has a reasonable expectation that the loan will be forgiven in a subsequent tax year.
The eligible expenses may be deducted in 2020 on a timely filed (including extensions) original income tax return or on an amended return or partnership Administrative Adjustment Request (“AAR”). In order to take advantage of the safe harbor, the taxpayer must attach a required disclosure statement to the return on which it claims a deduction for the expenses. Alternatively, the taxpayer may also deduct the eligible expenses in the subsequent tax year when the loan forgiveness is denied, or its application is withdrawn.
As discussed in our May 1, 2020, alert, there has been considerable discussion about the Congressional intent regarding the deductibility of eligible expenses paid from forgiven PPP loan proceeds. However, until Congress specifically addresses the issue to clarify its intent, taxpayers are required to treat the expenses attributable to forgiven PPP loan proceeds as nondeductible and report those expenses in accordance with the various guidance the IRS has issued during 2020.
For more information regarding the CARES Act and the SBA loan programs, please see the COVID-19 information page on the Whitley Penn website at https://www.whitleypenn.com/covid-19/.
Whitley Penn is continually monitoring the tax and economic developments related to the coronavirus pandemic and will send out additional alerts in the future. In the interim, please contact your Whitley Penn tax advisor if you have any questions or require any additional information.