The IRS has issued long-awaited guidance clarifying its position that the otherwise deductible expenses (payroll costs, benefits, utilities, rent, etc.) which lead to PPP loan forgiveness (PPP loan expenses) are not deductible in 2020 (i.e. the year the expenses were paid or incurred). This is the case as long as the borrower reasonably expects as of the end of the year to receive forgiveness of its PPP loan.
In Revenue Ruling 2020-27, two situations are illustrated. Situation 1 is where a borrower submits its PPP loan forgiveness application before the end of the year, but does not expect to receive an official determination of its forgiveness until 2021. In Situation 2, the borrower does not submit its application in 2020, but expects to do so in 2021. In both situations, the IRS holds that the PPP loan expenses are not deductible in 2020. Again, under the premise that, as of the end of the year, the borrower reasonably expected to receive forgiveness.
In the same announcement, the IRS released Revenue Procedure 2020-51. Rev. Proc. 2020-51 provides a safe harbor whereby a taxpayer may deduct such PPP loan expenses in 2020 basically if in a subsequent year the application for forgiveness is denied, or the taxpayer decides never to apply for forgiveness.
Now we will wait and see if any future legislation (i.e. perhaps part of any future stimulus bill) will be issued to overrule the above and allow deductibility of these PPP loan expenses.
Stay tuned and please contact us with any questions.