To stop Paycheck Protection Program (PPP) loan participants from claiming deductions and then later getting forgiveness for eligible PPP loan expenses, like payroll and rent, the IRS has issued Revenue Ruling 2020-27. As a result of this ruling, borrowers who have “reasonable expectation” that the loans will be forgiven, yet in 2020 or in 2021, may not claim the valid PPP expenditures as tax deductions.
The IRS describes two situations. In the first, a borrower pays payroll and mortgage interest that are valid PPP expenditures. The borrower applies for forgiveness in November 2020 and satisfied all requirements under the CARES Act to have it forgiven, but doesn’t yet have an answer as to whether it will be forgiven. In the second case, the borrower paid the same type of expenses with its PPP loan but expects to apply for forgiveness in 2021. In both cases, the IRS says the business cannot deduct these business expenses.
The IRS also released Revenue Procedure 2020-51 which provides a safe harbor for PPP borrowers whose loan forgiveness has been partially or fully denied or borrowers who choose to forego requesting loan forgiveness to claim a deduction for certain otherwise eligible payments on a timely filed return, amended return, or administrative adjustment request.
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