Issues Additional PPP Deductibility Guidance with Safe Harbor
While it may not be
the guidance that some borrowers were hoping for, the IRS released Rev.
Rul. 2020-27, which holds that taxpayers should not
deduct PPP funded expenses in the year the expense was paid or
incurred regardless of whether the taxpayer has sought forgiveness
on the loan. In addition, the IRS issued Rev. Proc. 2020-51, which provides
flexibility on how taxpayers that are denied PPP forgiveness or
forego PPP forgiveness can deduct PPP funded expenses.
Under the revenue
ruling guidance, PPP borrowers obtained PPP loans with the
expectation of reimbursement. In other contexts, this expectation
of reimbursement is sufficient enough to disallow a deduction, and
the revenue ruling holds this logic is similar for PPP expenses.
For example, a law firm advancing funds to clients to be repaid
upon a successful outcome has been denied the ability to claim a
deduction for the expenses paid with the advance as the advances
really operate as loans. Another example is when an expense is paid
or incurred for which the taxpayer has received prior authorization
to incur such expense.
In addition, the
ruling holds that PPP expenses would also be considered
nondeductible as a result of an allocation to tax-exempt income.
The Service states it does not matter whether loan forgiveness is
obtained prior to year-end as expenses are allocable to tax-exempt
income regardless of whether such tax-exempt income is received or
The above ruling will
have a particularly unwelcome effect on taxpayers who claim an
R&D credit. Losing the ability to deduct a research expense
(because of PPP loan forgiveness) means that the expenditures will
not be eligible to be treated as a section 174 expense or included
into an R&D credit claim. There was optimism that forgiveness
in a subsequent year might allow such a deduction and R&D
credit claim in the current tax year, but Rev. Rul. 2020-27 makes
it clear that is not the case. Similarly, the
non-deductibility of wages will have an impact on 199A deduction
Perhaps surprising to
some PPP borrowers is that the IRS does not distinguish its guidance
based upon the size of the loan. As many borrowers are acutely
aware, SBA is starting to issue requests to complete a loan necessity questionnaire, which
is causing concern with borrowers due to the nature of questions
The IRS also released a revenue procedure which provides a safe
harbor as to how a PPP borrower is to recover a disallowed
deduction. Under this safe harbor, a PPP borrower that has its loan
forgiveness denied, in whole or in part, or forgoes seeking loan
forgiveness can recover the deduction as follows:
1. On the 2020, taxable year timely
filed (including extensions) original income tax return.
2. Through an amended 2020 taxable
year income tax return or AAR adjustment, as applicable.
3. On the income tax return in a year
subsequent to the 2020 taxable year.
A statement is
required for the safe harbor should a borrower need to avail itself
of the revenue procedure.
nondeductibility of expenses paid with PPP forgiven funds is a
controversial subject as many feel Congress intended the expenses
to be deductible. As borrowers wait for Congressional action to fix
the deductibility issue, at least there is now authoritative
guidance for borrowers to rely upon as to the timing of
More details can be
found in the Forbes article, IRS
Crushes Hopes Of Deducting PPP-Paid Expenses Before Forgiveness
Approval; But Questions Remain, written by Tony Nitti
If you have any
questions please contact John Rittichier, CPA at firstname.lastname@example.org or
Mike Vogel, CPA at email@example.com.