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PPP Expenses Not Deductible if Reasonable Expectation of Forgiveness Exists (Regardless of Loan Forgiveness Timing)

Posted 8:15 PM by

This week, the IRS issued Revenue Ruling 2020-27, which dictates the timing of the non-deductible nature of eligible PPP loan expenses. Many had hoped that by delaying the loan forgiveness application – and, as a result, PPP loan forgiveness – until 2021, calendar-year taxpayers could shift the non-deductible event forward a year. We now have the IRS’ position on this issue: If there is a reasonable expectation of forgiveness, borrowers are out of luck. Chalk it up as another slight against PPP borrowers who have seen the benefits of this program deteriorate through a series of twists, turns, and about-faces all year.

The holding of the ruling sums it up:

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 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.

While the IRS position is not in doubt, there are crucial questions that remain unanswered:

  • If the loan amount is in excess of $2 million, does this pull into question the reasonableness of the forgiveness expectation, especially in light of the SBA’s covert release of the Loan Necessity Questionnaire (Forms 3509 and 3510)?
  • Do taxpayers have the latitude to determine which expenses are non-deductible, or are they required to allocate pro-rata amongst the pool of all eligible expenses? This could be particularly meaningful for some applications that rely on payroll (i.e., calculation of the R&D credit or the qualified business income deduction).

In response to this ruling, taxpayers will need to revisit estimated tax payments for 2020. While there is still anticipation that Congress will act to render the eligible expenses deductible, this ruling culminates a series of IRS pronouncements placing additional burdens on PPP borrowers.

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