The IRS has issued new guidance on the deductions used to obtain forgiveness of PPP loans. Under this guidance, the expenses used for PPP loan forgiveness will not be deductible on the 2020 return. For most taxpayers with PPP loans the effect will be to make the PPP loans taxable in 2020.
The SBA forgives the PPP loans for a business based on that business’s spending on payroll, rent, utilities, and interest on pre-existing loans. The IRS previously indicated that when these expenses are used to obtain loan forgiveness on the PPP loans, they would not be deductible for tax purposes. However, the previous guidance did not address how the IRS would treat a situation where the expenses are incurred in 2020 and the loan forgiveness is received in 2021.
In Revenue Ruling 2020-27, the IRS addressed this issue. In this ruling they determined that the amount of loan forgiveness is reasonably determinable by the end of 2020. As a result, the reduction should apply to the expenses as they are incurred in 2020. If the business has a reasonable expectation that the PPP loan will be forgiven, the amount of the PPP loan will be added to 2020 taxable income as an offset to the payroll, rent, interest and utility expenses that were used for loan forgiveness.
The IRS also issued Revenue Procedure 2020-51. This procedure allows a business to “true-up” its deductions if the SBA grants less loan forgiveness that expected. If the loan forgiveness is determined before the 2020 tax return is filed, the taxpayer should adjust the 2020 return to reflect the actual loan forgiveness. If the 2020 return is already filed, the taxpayer has the option to amend the 2020 tax return or to take the additional deductions on the 2021 return.
We continue to think that Congress will likely correct this issue and pass legislation that allows taxpayers to take the deduction for the expenses used to obtain PPP loan forgiveness. However, if Congress does not act, PPP borrowers will lose that deduction.