Many healthcare providers are taxable entities and secured PPP loans. These providers, like other businesses, were taken off guard when the IRS determined that qualifying expenses would not be deductible once loan forgiveness was secured. Additionally, taxpayers hoped that legislative action would be taken to allow the deductibility of expenses; however, many taxpayers believed, or at least hoped, that expenses used to support PPP loan forgiveness would need to be addressed in the year that loan forgiveness was secured. On Wednesday, the IRS clarified that not only are expenses used to secure PPP loan forgiveness not deductible, but these expenses are also nondeductible in 2020 even if loan forgiveness is not secured by the end of 2020.
Rev. Rul. 2020-27 addresses the question of whether a taxpayer that received a PPP loan and that paid or incurred certain otherwise deductible expenses can deduct those expenses in the tax year in which the expenses were paid or incurred if, at the end of that tax year, the taxpayer reasonably expects to receive forgiveness of the covered loan based on the otherwise deductible expenses.
The revenue ruling discusses two situations in which a taxpayer receives a PPP loan in 2020 and pays expenses, including payroll, mortgage interest, and rent, that are eligible expenses under Section 1106(a) of the CARES Act. In one situation, the taxpayer applies for forgiveness of the PPP loan (and knows the amount of expenses that qualifies) in November 2020 but has not been informed by the lender at the end of 2020 whether the loan will be forgiven. In the second situation, the taxpayer has not applied for loan forgiveness by the end of 2020 but knows the amount of expenses that qualify.
In both situations, the IRS’s position is that the taxpayer had a reasonable expectation of reimbursement (in the form of loan forgiveness) at the end of 2020; therefore, deduction of the expenses is inappropriate.
Rev. Proc. 2020-51 provides safe harbor rules that allow a taxpayer to ultimately claim a deduction in the taxpayer’s 2020 tax year for certain otherwise deductible eligible 2020 expenses if the taxpayer received a PPP loan that the taxpayer expects to be forgiven after its 2020 tax year and in a later year the taxpayer is denied PPP loan forgiveness, in whole or in part, or the taxpayer decides not to request PPP loan forgiveness. In that situation, under the revenue procedure’s safe harbor, the taxpayer can deduct some or all of the expenses on (1) a timely filed (including extensions) original tax or information return for the 2020 tax year, (2) an amended 2020 return or administrative adjustment request, or (3) a timely filed original tax or information return for the subsequent tax year.
Of course, businesses that secured PPP loans were under the impression that, in accordance with the Coronavirus Aid, Relief, and Economic Security (CARES) Act, PPP loan forgiveness would not be taxable to the borrower. In fact, the loan forgiveness is currently taxable because of the non-deductibility of the expenses used to support the loan forgiveness.
The CARES Act itself does not address whether expenses by a recipient of a covered loan are allowed if the covered loan is subsequently forgiven; however, we believe that the IRS’s interpretation denying deductions of expenses forgiven under the PPP program is contrary to Congress’s intent. Legislative efforts to remedy this tax issue have failed to date. We are currently not aware of any additional efforts for remedy and businesses should plan accordingly.