Treasury Disallows 2020 Deduction for Expenses Paid Using Forgivable PPP Loan Funds

11/24/2020

By Jack Rybicki Managing Principal of Industry, CliftonLarsonAllen Email T. 813.3842701

Key insights

  • Revenue Ruling 2020-27 sets forth the IRS’s determination that a PPP borrower may not deduct eligible expenses on its 2020 tax return if the borrower has a “reasonable expectation” that its PPP loan will be forgiven.
  • “Reasonable expectation” is present regardless of whether the borrower has filed its application for PPP loan forgiveness or has been informed by its PPP lender of the loan forgiveness decision prior to the end of the tax year.
  • Revenue Procedure 2020-51 provides a safe harbor allowing a PPP borrower to claim a deduction for otherwise non-deductible eligible expenses if forgiveness is denied in whole or in part, or, if the PPP borrower decides not to request forgiveness.

On November 18, the Internal Revenue Service (IRS) issued Revenue Ruling 2020-27 and Revenue Procedure 2020-51. This guidance collectively addresses the timing of the disallowance of deduction of eligible costs incurred during 2020 that were paid using proceeds from a loan guaranteed under the Paycheck Protection Program (PPP).

The IRS has determined that if a PPP borrower “reasonably expects” to have the PPP loan forgiven, the PPP borrower may not deduct eligible expenses in its 2020 taxable year. Revenue Ruling 2020-27 provides clarity that a “reasonable expectation of forgiveness” is likely present:

  • Regardless of whether or not the PPP borrower has filed its application for PPP loan forgiveness prior to the end of its tax year, and,
  • Even if the PPP lender has not notified the PPP borrower of forgiveness prior to the end of its tax year.

Safe harbor

Revenue Procedure 2020-51 provides a safe harbor allowing a PPP borrower to claim a deduction on its 2020 tax return related to these otherwise non-deducted eligible expenses if:

  1. The PPP borrower’s request for forgiveness is denied in whole or in part, or,
  2. The PPP borrower decides not to request forgiveness of its PPP loan.

If one of the two events above occurs subsequent to the end of the PPP borrower’s 2020 tax year, the expense deduction can be included on either a timely filed (including extensions) original income tax return for the 2020 tax year, an ameded return for the 2020 tax year, or the PPP borrower’s timely filed 2021 original income tax return.

If a borrower uses the safe harbor to deduct the expenses on its 2020 originally filed or amended tax return, a statement titled “Revenue Procedure 2020-51 Statement” must accompany the return.