Paycheck Protection Program ("PPP") Loan Update
When the CARES Act passed last March, it contained provisions that created the PPP loan program. PPP loans were for businesses negatively impacted by the pandemic and eligible for “tax-free” principal forgiveness if certain conditions were met. On April 30, 2020, the IRS issued Notice 2020-32, which stated that expenses used to obtain loan forgiveness would not be deductible. Effectively, this made PPP loan forgiveness taxable.
Since borrowers may submit a loan forgiveness application any time before the maturity of the loan, this created an important question: Are the expenses related to loan forgiveness non-deductible when paid (2020) or when forgiveness is granted (which could be 2021 or later)?
On November 18, 2020, the IRS issued Revenue Ruling 2020-27 and Revenue Procedure 2020-51, which contained the answer. If, at the end of 2020, a taxpayer reasonably expects to receive PPP loan forgiveness, even if that taxpayer has not submitted an application for forgiveness by the end of the year, the taxpayer may not deduct those expenses in the year in which they were paid or incurred. Inversely, a taxpayer may claim those deductions in 2020 if the taxpayer expects to be forgiven in a tax year after 2020 and the forgiveness request is denied, or the taxpayer decides never to request forgiveness of the loan at all.
Note: There is currently legislation stalled in Congress that would allow the expenses to be deducted, which would render PPP loan forgiveness truly tax-free. We will keep you updated on this as we receive more information.