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IRS-PPP Loan Expenses Not Deductible If Loan Forgiven

3 minute read
November 23, 2020
(An update is pending for this post. Recent legislation has changed the tax treatment of forgiven PPP loans. We will address the new rules soon)

More than 5 million PPP loans were issued by the Small Business Administration between  between early April 2020 and early August. The express purpose of the PPP loan program was to help small businesses pay wages/salaries, rent, mortgage interest, and utilities.

Most Lubbock banks are encouraging borrowers to begin applying for forgiveness, and forgiveness approvals have already been issued to many Lubbock borrowers. However, coinciding with these forgiveness approvals, the IRS has reiterated that borrowers who receive forgiveness for the PPP loan or who reasonably expect forgiveness of the loan may not deduct the associated expenses paid from the PPP loan.

Revenue Ruling 2020-27

A taxpayer that received a covered loan guaranteed under the PPP and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the CARES Act may not deduct those expenses (emphasis added) 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, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.

Revenue Ruling 2020-27 provides two basic scenarios

Company A

Company A received a PPP loan in 2020. In November 2020, Company A applied forgiveness of the loan, and it was reasonable to assume the loan would be be forgiven. Since it was reasonable to assume the loan would be forgiven, Company A is not allowed to deduct the expenses attributable to the loan on Company A's 2020 calendar year tax return.

Company B

Company B received a PPP loan in 2020. At the end of 2020, Company B has still not applied for forgiveness. In 2021, Company B applied for forgiveness. At the end of 2020, Company B reasonably knew the eligible expenses incurred, and reasonably believed the loan forgiveness approval would be forthcoming. Company B is not allowed to deduct the expenses attributable to the loan on Company B's 2020 calendar year tax return.

Revenue Procedure 2020-51

The revenue procedure provides safe harbors for taxpayers who apply for loan forgiveness for a PPP loan received in 2020 and expects forgiveness of such loan in 2021, but such forgiveness is either denied or partially denied. Partially denied just simply means that some portion of the loan must be repaid. This guidance also applies to borrowers who choose not to apply for forgiveness as well.

So, the revenue procedure provides for scenarios as to how to claim allowed deductions on the 2020 tax return or an amended tax return for 2020. The deductions are allowed or partially allowed because the loan forgiveness was either denied or only partially forgiven.

Photo by The New York Public Library on Unsplash

Tax Implications

The disallowed deductions may create an unwanted tax surprise at the end of 2020 and could flip what appears to be a tax loss for the year in to a profit when the disallowed deductions are taken out of the tax income statement. Be sure and plan for this when considering your 2020 income tax liability.

There is still a possibility Congress could act to change the deductibility of PPP loan expenses, and it does not seem likely before the end of 2020. If something changes, we will update this post.

We serve clients in Lubbock, Texas and throughout the State of Texas. Join the conversation on Facebook @bradleysmithinc

Photo by Joshua Rodriguez on Unsplash