IRS Addresses Timing and Tax Deductibility for PPP Loan Forgiveness

IRS Addresses Timing and Tax Deductibility for PPP Loan Forgiveness

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SBA PPP LOAN FORGIVENESS RULES

By Scott Zickefoose, CPA, CM&AA, Transaction Advisory & Tax Partner | Business Turnaround Services

New IRS Revenue Ruling 2020-27: Important Tax Details for Paycheck Protection Program Loan Recipients

On November 18, 2020, the Internal Revenue Service (IRS) issued Revenue Ruling 2020-27 to address questions surrounding the timing and nature of tax items attributable to Paycheck Protection Program loan forgiveness. This Revenue Ruling serves to clarify and expand on issues first raised in Notice 2020-32, published on April 30, 2020.

Notice 2020-32 clarified the IRS’s position that no deduction is allowed under the Internal Revenue Code (IRC) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to Section 1106(b) of the CARES Act. This declaration treated income associated with loan forgiveness as taxable, by way of disallowing deductions.

This Notice lacked important details that left taxpayers and practitioners with questions. When should a taxpayer recognize the income attributable with the loan? At the time the loan is forgiven? In the period the expenses were incurred?  What if loan forgiveness is applied for in one tax year but not approved/granted until the next?

Overview of Notice 2020-27 for PPP Loan forgiveness

The IRS’s new Revenue Ruling indicates that a taxpayer may not deduct 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 on the basis of the expenses it paid or accrued during the covered period. The Paycheck Protection Program allows for various periods of time to incur/pay qualifying expenses, but at no point can those expenses be incurred after December 31, 2020.  As such, the new guidance means that taxpayers will have taxable income, by way of disallowed deductions, in the tax year in which the expenses were incurred (2020 for calendar year taxpayers). The amount of disallowed expenses will equal the amount of expected loan forgiveness. This is true even if the taxpayer has not submitted an application for loan forgiveness by the end of the year.

The IRS relies on IRC Section 265(a)(1) and Regulation Section 1.265-1 which states that rules related to tax exempt income apply “whether or not any amount of income of that class or classes is received or accrued.” There are several court cases related to expense reimbursement and tax-exempt income referenced throughout the Revenue Ruling.

The IRS also released a separate Revenue Procedure, Rev. Proc 2020-51, which provides procedures and protections for taxpayers who ultimately have their loan forgiveness application partially or full denied.

There has been commentary regarding bipartisan support for legislation to eliminate the non-deductible classification of expenses funded by the Paycheck Protection Program. This would be welcome relief and would seem to return the Paycheck Protection Program no forgiveness of debt income to the initial Congressional intent.

Our team continues to monitor the Paycheck Protection Program and related IRS Guidance. If you have questions about how these changes impact your business, please contact our Keiter advisor, Email | Call 804.747.0000

Additional Paycheck Protection Programs and COVID-19 Business Planning Resources

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About the Author

Scott Zickefoose works with both large and mid-market clients in the real estate, construction, and manufacturing industries, as well as with private equity firms and emerging businesses. He works closely with his clients to identify tax planning and savings opportunities.  His experience includes single and multi-state corporate and flow-through tax planning and compliance, corporate tax provisions (FAS 109 and FIN 48), and individual income taxation. Scott is a member of the Keiter Merger and Acquisition team and Future Leaders group.

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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.

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