On Wednesday, the IRS issued Revenue Ruling 2020-27, addressing a question that has been on the minds of many PPP loan recipients: whether the timing of PPP loan forgiveness impacts the timing of the nondeductibility of the expenses paid with PPP funds. The ruling concludes the timing of the forgiveness does not alter the timing of the nondeductibility.
The CARES Act specifically states that the forgiveness of a PPP loan is not treated as taxable income. However, the IRS announced in Notice 2020-32 that the otherwise deductible expenses paid with forgiven PPP funds would not be deductible for tax purposes. The result of this is the same as if the forgiveness were taxable. Since it is the forgiveness that triggers the nondeductibility, there has been debate around the significance of the timing of that forgiveness. The qualified expenses must be incurred in 2020, but if the loan is not forgiven until 2021, should those expenses be deducted in 2020? The IRS has now said “no.”
Revenue Ruling 2020-27 says that if a PPP borrower “reasonably expects to receive forgiveness of the covered loan,” that taxpayer may not deduct those expenses in 2020, even if they have not applied for forgiveness before the end of the year, or if they have applied before year end but they have not yet been notified of forgiveness. This “reasonable expectation” language is reminiscent of the subjectivity around the “necessity” determination that was a key focus of the original PPP loan process. Borrowers should be consistent; choosing not to deduct the qualified expenses supports the position that the PPP loan should ultimately be forgiven.
This issue could be rendered moot if Congress steps in. Members of both houses have stated that the intent of the law was for the forgiveness to be completely nontaxable, and legislation has been introduced to reverse the IRS’s conclusion. But any change to the current situation depends on a bill getting through Congress and being signed into law by the President.
Concurrently with the Revenue Ruling, the IRS issued Revenue Procedure 2020-51, which addresses one of the inherent questions arising from the holding of Revenue Ruling 2020-27: what happens if a PPP recipient does not deduct qualified expenses (pursuant to Rev. Rul. 2020-27) but is later denied forgiveness, or chooses not to request forgiveness? The new Revenue Procedure allows these borrowers to deduct the expenses on an original or amended return for 2020, or on their 2021 return.