Guidance on PPP Non-Deductibility Timing

Guidance on PPP Non-Deductibility Timing

November 20, 2020

On November 18, the IRS released Rev. Rul. 2020-27, which clarifies the timing of the non-deductibility of expenses related to forgiven PPP proceeds. This is a follow up to the original IRS guidance issued in May stating that, while the CARES Act stipulated that forgiveness of the PPP loan does not trigger taxable income, the expenses that were paid for with the forgiven funds would be non-deductible. These expenses can include a mix of payroll, certain employee benefits, rent, utilities, and mortgage interest. Knowing that this was the IRS’ position, there were still questions, primarily related to the timing of when those expenses became non-deductible.

The ruling from the IRS has confirmed that, in general, the expenses are non-deductible in 2020. Specifically, the ruling uses an example of a business waiting to file their forgiveness application until 2021 and states that the deferral of filing the application would not be enough to defer the tax consequences until 2021. The IRS further explains that most businesses should be able to reasonably determine their forgiveness position, whether or not they actually file or receive confirmation with the SBA. As a result, it makes sense for most businesses to continue working to gather information and file their application as soon as they feel comfortable doing so. This way, businesses can get the application in order and develop a better understanding of what their forgiveness may be when planning for year-end.

This has been the position HBE has assumed over the past few months, as it has seemed that there was a good chance of this being a 2020 issue, not a 2021 issue. We are glad to have the confirmation of the IRS’ standpoint on this position.

It is important to note that this determination is based on the current law and IRS interpretation of the law. There is still bi-partisan support in Congress for passing a law that would allow the expenses to remain deductible. A law of this nature would remove the tax consequences of PPP forgiveness all together. However, there has been no major action taken at this point in time. While we are still hopeful that Congress will act and make the change, it is not where the current law sits. As such, year-end planning should be based on the assumption that the current law will prevail.
HBE is here to help our clients work through the PPP forgiveness process. If you have any questions about the impacts to your specific situation, please contact our office.

This communication and any applicable contents pertaining to COVID-19 employer relief provisions is based on our professional judgment given the facts provided to us and the COVID-19 employer relief provisions guidance as of the date of the communication. Subsequent developments changing the facts provided to us, or differences in the final guidance and regulations once they are issued, may affect the advice provided. These effects may be material.