The IRS has issued new guidance on tax liability for PPP loan recipients. According to the new guidance, taxpayers cannot claim a deduction for any otherwise deductible expense if the payment of the expense results in forgiveness of a PPP loan. The income associated with the forgiveness of the loan is excluded from gross income under the CARES Act.
As a reminder, a PPP loan can only be used to pay for the following expenses:
- Payroll Costs
- Any payment of interest on any covered mortgage obligation
- Any payment on any covered rent obligation
- Any covered utility payment
The IRS clarified these issues in two new documents, a revenue ruling (Rev. Rul. 2020-27), and a revenue procedure (Rev. Proc. 2020-51).
Rev. Proc. 2020-51 provides a safe harbor for PPP loan recipients whose loan forgiveness has been partially or fully denied, or who decide not to request loan forgiveness to claim a deduction for some otherwise deductible eligible payments.
For taxpayers do not request loan forgiveness, the safe harbor also allows them to claim a deduction for the otherwise deductible eligible payments on an original income tax return or information return, as applicable, for the taxable year in which the taxpayer decides to forego requesting forgiveness.
Rev. Rul. 2020-27 offers guidance on whether a PPP loan participant that has paid or incurred certain otherwise deductible expenses can deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of that year, the taxpayer expects the loan to be forgiven.
Guidance for PPP loans has changed many times over the past year, and could change again in the future. To discuss your unique situation and plan for what the future holds, please contact us today.