The Treasury Department and IRS recently released Revenue Ruling 2020-27 and Revenue Procedure 2020-51, which provide additional guidance pertaining to the Paycheck Protection Program (PPP) created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
Under the CARES Act, a PPP loan borrower can receive loan forgiveness equal to the amount paid during the covered period for qualifying expenses, and any amount forgiven will be excluded from the borrower’s gross income on its annual income tax return. Earlier this year, IRS issued Notice 2020-32, announcing that PPP loan borrowers will not be permitted to deduct otherwise deductible expenses to the extent the payment of such expenses results in loan forgiveness under the CARES Act. In the new guidance, Revenue Ruling 2020-27 and Revenue Procedure 2020-51, Treasury and IRS reiterate the position that borrowers of PPP loans cannot claim tax deductions for any expenses paid for using PPP loan funds if the loan is eventually forgiven, or if a borrower reasonably believes that a loan will be forgiven in the future. For an overview of the CARES Act, the Flexibility Act and prior guidance regarding loan forgiveness, click here.
Revenue Ruling 2020-27 takes this reasoning a step further to address the issue faced by borrowers that use PPP funds to pay qualified expenses during tax year 2020, but whose PPP loans are not expected to be forgiven until tax year 2021. Rev. Rule 2020-27 holds that, if at the end of the taxable year, a borrower reasonably expects its PPP loan to be forgiven, such borrower may not take deductions for qualified expenses paid or accrued during the covered period using PPP funds. This holding applies even if the borrower has not submitted an application for forgiveness of the loan by the end of the taxable year.
Revenue Procedure 2020-51, however, provides safe harbor rules for PPP loan borrowers whose loan forgiveness applications are denied or who ultimately choose not to request loan forgiveness. In either of these situations, according to the revenue procedure’s safe harbor, a borrower can deduct some or all of the expenses on (1) a timely filed (including extensions) original tax or information return for the 2020 tax year, (2) an amended 2020 return or administrative adjustment request, or (3) a timely filed original tax or information return for the subsequent tax year.
Notwithstanding the foregoing, some members of Congress are advocating for the allowance of deductions for all qualified expenses under the CARES Act, even for loans that are forgiven.
Taylor Porter attorneys continue to closely monitor the developments of the SBA loan programs and the CARES Act. Visit the Taylor Porter Coronavirus - Legal News and Business Resources website for updated legislation, news, and legal developments pertaining to COVID-19.
About Bob Barton: Taylor Porter Managing Partner Bob Barton, practicing law since 1994, represents local and national businesses in matters involving commercial litigation and transactions, regulatory and compliance matters, and general litigation. He is the co-chair of the firm's Business and Commercial Litigation practice. Bob has been selected for inclusion in both Louisiana Super Lawyers and Best Lawyers in Business Litigation.
About Ashley Carver Meredith: Taylor Porter Associate Ashley Carver Meredith practices in a wide array of areas including commercial litigation, commercial transactions, health care compliance, estate planning, and successions. Ashley is admitted to practice before all Louisiana federal and state courts.. Ashley earned her J.D. in 2014 from the Paul M. Hebert Law Center. Ashley graduated in 2011 from Louisiana State University, where she received her bachelor of arts in Mass Communication and minored in Political Science. She was also a member of LSU Honors College.
About Ryan Gonzales: Taylor Porter Associate Ryan Gonzales is a certified public accountant and a former tax associate of a national tax practice. Ryan assists clients with the tax implications of transactions, such as mergers, acquisitions, disposals, and restructurings, and he advises clients on tax planning and compliance at the federal, state and local levels with respect to various taxes including business and individual income tax, franchise tax, excise tax, ad valorem tax, sales and use tax, payroll tax, and transfer tax. Ryan previously served as a law clerk for the U.S. Senate Committee on Finance in Washington, DC.
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