Since the inception of the Paycheck Protection Program (PPP), there have been many questions around the taxability of loan proceeds. As we approach the end of the year, it is imperative to consider the details of your PPP loan in regard to year-end tax planning.
The IRS has not changed its stance that eligible expenses that lead to loan forgiveness are not deductible. However, additional clarity on this subject has been provided with the recent Revenue Ruling 2020-27 and Revenue Procedure 2020-51.
The revenue ruling states that taxpayers must disallow PPP-related eligible deductions in the tax year the expenses are incurred if the taxpayer has a reasonable expectation of forgiveness of a PPP loan—even if the taxpayer has not yet submitted for forgiveness by the end of the tax year.
For calendar year taxpayers expecting forgiveness of a PPP loan, expenses are not deductible in 2020. However, for fiscal year taxpayers, determining if and when your expenses may be deducted may be more complicated.
The revenue procedure also provides a safe harbor which allows taxpayers to claim a deduction in 2020 if loan forgiveness is not anticipated, and;
- The eligible expenses are paid or incurred during the taxpayer’s 2020 taxable year, and
- The taxpayer received a PPP loan and at the end of the year the taxpayer expects the loan forgiven in a taxable year after 2020, and
- In the subsequent taxable year, the taxpayer’s request for forgiveness is denied or the taxpayer never requests forgiveness.
***The 2020 tax implications of the non-deductibility of expenses incurred related to the PPP loan program should be evaluated immediately. This evaluation could substantially impact your year-end tax planning decisions and your 4th quarter estimated tax payments due.
Navigating tax code and compliance can be daunting. We’re here to help you now, and into the future. If you have any questions about how your PPP loan will impact your 2020 tax planning, click here to contact us.