As you might remember, back in April 2020 Congress passed and the President signed the CARES Act, part of which provided funds to the Small Business Administration (SBA) to make Paycheck Protection Program (PPP) loans to businesses. Many taxpayers took these loans with the intention of making the required payments and having the loans forgiven. Many taxpayers are planning to, or already have, applied to the SBA for forgiveness of these PPP loans.
In June 2020, IRS released IRS Notice 2020-32. This guidance stated that while under the CARES Act, the forgiveness of these PPP loans are treated as tax-exempt income, payment or accrual of the expenses required for such forgiveness will be disallowed pursuant to Internal Revenue Code Sec. 265. What was left unstated in this notice is the timing of this disallowance. Since some taxpayers may not receive notice of their forgiveness until after the end of 2020 tax year, the timing of the disallowance becomes critical.
Recently the IRS released two more documents with guidance regarding the timing of the disallowance of expenses related to PPP loan forgiveness:
1. Revenue Ruling 2020-27
Under this ruling, taxpayers "may not deduct those 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, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year."
Due to the IRS’s lack of emphasis on the date that the taxpayer receives notice of the PPP Loan forgiveness by the SBA, the disallowance of expenses for taxpayers expected to have their loans forgiven will be in 2020 unless they have reason to believe that such loan will not be or will only be partially forgiven.
2. Revenue Procedure 2020-51
This revenue procedure deals with what a taxpayer should do if they followed Rev. Rul. 2020-27 regarding disallowed expenses and it is later determined that some or all of the PPP loan will not be forgiven. Affected clients may either amend their 2020 (or FY ended in 2020) income tax return or reverse the appropriate portion of the expenses in 2021 (or FY ended in 2021).
Stay tuned as there will be more information released on this topic.
Interested in learning more? You can also reach out to me at JPena@JPAMiami.com