Paycheck Protection Program Loan Forgiveness: Expenses Not Deductible and New Safe Harbor Rule

The IRS issued new guidance regarding deductions for the Paycheck Protection Program (PPP) loan forgiveness. It includes information on denying a deduction when a loan is forgiven and a safe harbor for loan forgiveness that is denied.

When a loan is expected to be forgiven

ppp loanRev. Rul. 2020-27 confirms the position that borrowers whose PPP loans are forgiven (or expect to be forgiven) can’t deduct business expenses paid for by the loan. In the ruling, the IRS determined that if the loan proceeds were used during the covered period for eligible expenses under the CARES Act, no such additional relief can be permitted so long as it is reasonably foreseeable that the PPP loan would be forgiven under the CARES Act.

This ruling reiterates Notice 2020-32 which states that a taxpayer that receives a loan through the PPP isn’t permitted to deduct expenses that are normally deductible under the Code to the extent the payment of those expenses results in loan forgiveness under the CARES Act.  Taxpayers can’t deduct expenses that are allocable to income that is either wholly excluded from gross income or wholly exempt from the taxes.

Safe harbor for loans not forgiven

The IRS also issued safe harbor rules in Rev. Rule. 2020-51. This allows taxpayers to claim a deduction if the eligible expenses are paid or incurred during the 2020 tax year and the taxpayer expects to be forgiven in a subsequent tax year, but the request for forgiveness is denied, in whole or in part, or the taxpayer decides never to request forgiveness of the covered loan.

The taxpayer can deduct some or all of the expenses on:

  • a timely filed (including extensions) original tax or information return for the 2020 tax year
  • an amended 2020 return or administrative adjustment request, or
  • a timely filed original tax or information return for the subsequent tax year.

Applying for the safe harbor

In order to apply for the safe harbor, the taxpayer must attach a statement to their return titled “Revenue Procedure 2020-51 Statement” that contains:

  1. the taxpayer’s name, address, and social security number or employer identification number;
  2. a statement specifying whether the taxpayer is an eligible taxpayer under either section 3.01 or section 3.02 of Revenue Procedure 2020-51;
  3. a statement that the taxpayer is applying section 4.01 or section 4.02 of Revenue Procedure 2020-51;
  4. the amount and date of disbursement of the taxpayer’s covered PPP loan;
  5. the total amount of covered loan forgiveness that the taxpayer was denied or decided to no longer seek;
  6. the date the taxpayer was denied or decided to no longer seek covered loan forgiveness; and
  7. the total amount of eligible expenses and non-deducted eligible expenses that are reported on the return.

Questions

If you have questions or need guidance on your PPP loan forgiveness, contact us to discuss with our team of experts.

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