The IRS issued Rev. Rul. 2020-27 on November 18, 2020 affirming that a taxpayer who receives a covered loan guaranteed under the Paycheck Protection Program (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 the taxpayer reasonably expects to receive forgiveness.
The following situations provided by the revenue ruling have the taxpayer computing taxable income based on the calendar year for federal income tax purposes for receiving a covered loan in 2020.
Situation 1. During the period beginning on February 15, 2020, and ending on December 31, 2020, Taxpayer A (A) paid expenses that are described as eligible expenses. These qualifying expenses include payroll costs, interest on a mortgage, utility payments, and rent. In November 2020, A applied to the lender for forgiveness of the covered loan based on the eligible expenses it paid during the covered period. At that time, and based on A’s payment of the eligible expenses, A satisfied all requirements for forgiveness of the covered loan. The lender does not inform A whether the loan will be forgiven before the end of 2020.
Situation 2. During the covered period, Taxpayer B (B) paid the same types of eligible expenses that A paid in Situation 1. B, unlike A, did not apply for forgiveness of the covered loan before the end of 2020, although, considering B’s payment of the eligible expenses during the covered period, B satisfied all other requirements for forgiveness of the covered loan. B expects to apply to the lender for forgiveness of the covered loan in 2021.
The issued revenue ruling does provide a safe harbor which allows taxpayers to claim a deduction in their taxable year beginning or ending in the tax year 2020 under the following scenario.
Taxpayers can claim a deduction if eligible expenses are paid or incurred during the tax year 2020, the taxpayer receives a covered PPP loan which the taxpayer expects to be forgiven, and in the subsequent year request for forgiveness is denied.
Under this scenario, taxpayers may be able to deduct some or all of the eligible expenses on their timely filed tax return or amended tax return.
We will continue to monitor any legislative changes regarding the nondeductibility of PPP-funded costs and provide updates in order to help taxpayers monitor their tax situations. If you have any questions regarding the impact of your Payroll Protection Program Loan, do not hesitate to contact Schneider Downs.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.