The Bottom Line
The Bottom Line is where Klatzkin’s advisors provide analysis and insight into key developments in taxation, accounting, and other issues and how they affect businesses and individual taxpayers.

New PPP Guidance Addresses Deductibility of Covered Expenses

By LAURA WEBER-CARNEVALE, CPA

November 20, 2020

For months before the Presidential election, Congress debated another round of Coronavirus aid to help individuals, businesses, and government agencies affected by the pandemic. Although the House and Senate bills featured many differences, they contained various provisions to make Paycheck Protection Program (PPP) loan forgiveness easier. However, since Congress could not pass any additional legislation, businesses have remained uncertain on when to apply for forgiveness and how to handle qualifying expense deductions. Many have decided to wait for additional direction, which makes sense given the 26 interim final rules issued since the launch of the PPP.

The good news is borrowers now have further guidance from the recently issued IRS Revenue Ruling 2020-27, which provides new information on loan expense deductibility. We have provided a summary of the key details below.

Existing Guidance

In May, it was announced via IRS Notice 2020-32 that a borrower could not take a deduction for eligible expenses, even if it would otherwise be deductible if the payments are included on the loan forgiveness application. This unexpected announcement left borrowers with a tax disadvantage because of the effect on net income.

What’s Changed?

The recently issued guidance goes one step further by stating a borrower may not deduct PPP expenses in the taxable year they were incurred if the taxpayer reasonably expects to receive loan forgiveness, even if they have not applied by the end of 2020. The emphasis on reasonable expectation means most borrowers will not take deductions, even if they have yet to apply for loan forgiveness.

New Guidance – In Practical Terms 

There are two examples offered to illustrate how borrowers will be impacted. In the first example, a taxpayer received a PPP loan and paid for qualifying payroll, mortgage interest, rent, and utility payments. In October 2020, the borrower applied for loan forgiveness but did not confirm whether the loan would be forgiven. In the second example, all the information remains the same except that the borrower did not apply for loan forgiveness before year-end. According to the latest guidance, neither taxpayer would be allowed to deduct the expenses because they have a reasonable expectation that loan forgiveness will occur.

The IRS also announced a new Safe Harbor program, in IRS Revenue Procedure 2020-51, that permits a taxpayer to deduct expenses if certain conditions are met. Specifically, a taxpayer who uses PPP loan proceeds to pay eligible expenses in 2020 applies for loan forgiveness but receives partial or complete denial and can deduct relevant expenses. If this happens, then the taxpayer can make deductions on a timely filed return or through an amended return.

When leveraging the safe harbor, a taxpayer must attach a Revenue Procedure 2020-51 Statement, which should include the following details:

  1. Taxpayer’s name, address, and social security number or Employer Identification Number (EIN).
  2. A statement of eligibility.
  3. A statement the taxpayer is applying the safe harbor provisions.
  4. The amount and disbursement date of the taxpayer’s covered loan.
  5. The total amount of loan forgiveness was denied or decided to no longer seek forgiveness.
  6. The date the taxpayer was denied or decided to no longer seek loan forgiveness.
  7. The total amount of eligible expenses and non-deducted expenses reported on the return.

Contact Us

The new guidance addresses any doubt on whether a borrower can deduct loan-related expenses. The Safe Harbor provides a welcome backstop should a taxpayer’s loan forgiveness application be rejected. If you have questions about the information outlined above or need assistance with another PPP-related issue, Klatzkin can help. For additional information, click here to contact us. We look forward to speaking with you soon.

©2020 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and should not be construed as accounting, tax, or financial advice. Please consult your tax advisor concerning your specific situation.

About the Author

Laura is the Partner-in-Charge of Klatzkin’s Newtown office and focuses on providing accounting and tax solutions to companies in the real estate, professional services, and manufacturing industries. She also works with business owners and high net worth individuals optimizing their estate tax planning strategy. While clients look to her for compliance and planning, it’s the...

Contact Us

  • This field is for validation purposes and should be left unchanged.

By Date

Subscribe to Blog