Last week, the IRS published Revenue Ruling 2020-27 providing guidance on the deductibility of expenses that are considered eligible expenses when applying for loan forgiveness under the Paycheck Protection Program (PPP). Eligible expenses include payroll costs, rent, utilities and interest on mortgage obligations paid during the covered period.
What the ruling says
The Revenue Ruling states that if you received a PPP loan and paid eligible expenses with those loan proceeds during 2020, then those expenses are not tax deductible if you reasonably expect your loan to be forgiven.
The intent when Congress passed the PPP legislation was for there to be no tax impact from the loan forgiveness. Currently, Congress is discussing additional legislation to treat eligible expenses as tax deductible. However, there is no guarantee that Congress will pass such legislation before the end of 2020 or at all.
At this time, the Revenue Ruling provides the most authoritative guidance for the tax treatment of eligible expenses. Taxpayers who expect to get PPP loan forgiveness have several options to consider in the event Congress does not pass legislation prior to the original due date of their tax return:
- File 2020 tax returns in a timely fashion without deducting the PPP expenses. The taxpayer may need to amend those tax returns to take the deductions if Congress later reverses the IRS Revenue Ruling through legislation.
- File 2020 tax returns in a timely fashion and claim deductions for PPP expenses. To mitigate potential penalties, the taxpayer will need to include a disclosure with their return claiming substantial authority exists for taking the position that eligible expenses are deductible contrary to the IRS published Revenue Ruling.
- Request extensions of time to file returns to give Congress more time. The taxpayer will need to determine if additional estimated tax should be paid with the filing of the extension.
As always, AGH will continue to monitor developments and provide updates as further official guidance is provided.
For additional information and applicability to your tax situation, we recommend consulting with your AGH tax advisor or Shawn Sullivan using the information below.
NOTE: Any advice contained in this material is not intended or written to be tax advice, and cannot be relied upon as such, nor can it be used for the purpose of avoiding tax penalties that may be imposed by the IRS or states, or promoting, marketing or recommending to another party any transaction or matter addressed herein.
Executive Vice President
Shawn serves as one of two primary leaders in the firm’s large tax group. He has extensive public and private experience in the fields of tax and accounting and works frequently with clients in the manufacturing, wholesale/retail distribution, real estate development and management, construction, and contractor industries. In addition to enhancing business performance to minimize tax consequences, he has experience in mergers and acquisitions and international tax and business structuring.
A certified public accountant, Shawn is a member of the American Institute of Certified Public Accountants, the Kansas Society of Certified Public Accountants (KSCPA) and chairs the KSCPA Committee on Taxation.