On November 18, the IRS released Revenue Procedure 2020-51, which provides a safe harbor rule on when a taxpayer can deduct expenses funded with a PPP loan.
The safe harbor applies either if the SBA denies some or all of the loan forgiveness or if the taxpayer elects to not file for loan forgiveness. Under the safe harbor, if the taxpayer follows the reporting requirements in Section 4 of the revenue procedure, they can deduct otherwise allowable expenses up to the amount of PPP principal for which loan forgiveness was denied or not sought.
If the safe harbor does not apply, then in most cases, under Revenue Ruling 2020-27, the expenses will not be deductible in the year incurred.
The deductions will be allowed on any of the following:
- The taxpayer’s timely filed original return, including extensions, for the tax year in which the costs were paid or incurred
- An amended return (or, in the case of certain partnerships, an Administrative Adjustment Request) for that tax year
- The taxpayer’s timely filed original return, including extensions, for the subsequent year.The revenue procedure does not specifically allow or specifically forbid the deduction for the subsequent year to be taken on an amended return (or AAR) for that year.
The revenue procedure specifically covers the “2020 taxable year” and the “subsequent year.” It is reasonable to assume that the “2020 tax year” should be read to mean the tax year in which the PPP eligible costs were paid or incurred.
Let’s take a look at two examples:
The taxpayer filed their loan forgiveness application in 2020, requesting a full loan forgiveness of $200,000. The taxpayer had a reasonable expectation of receiving loan forgiveness. In accordance with IRS Revenue Ruling 2020-27, the taxpayer filed their calendar year 2020 income tax return without taking deductions for otherwise qualified business expenses in the amount of $200,000.
In 2021, they receive notice from their lender that only $175,000 was forgiven. Under this revenue procedure, the taxpayer has the option of amending their 2020 income tax return (or filing an AAR) to deduct $25,000 of expense or claiming the $25,000 of expenses on their 2021 income tax return.
The taxpayer incurred $400,000 of qualified PPP expenses in 2020. At year end, they had not filed their loan forgiveness application but expected to do so in 2021 and they had a reasonable expectation of receiving loan forgiveness. In accordance, with IRS Revenue Ruling 2020-27, the taxpayer filed their 2020 income tax return without taking deductions for otherwise qualified business expenses in the amount of $400,000.
In 2021, the taxpayer changed their mind and decided not to file for loan forgiveness and to keep the PPP funds as a loan. Under this revenue procedure, the taxpayer has the option of amending their 2020 income tax return (or filing an AAR) to deduct $400,000 of expenses or claiming the $400,000 of expenses on their 2021 income tax return.
While the need of the revenue procedure is questionable, as the taxpayer would already be eligible to deduct qualified business expenses, there are specific reporting requirements in Section 4 of the revenue procedure that could be a trap for the unwary who file or amend 2020 or 2021 income tax returns without following these reporting rules.
Section 4 of the revenue procedure requires that the taxpayer attach a statement to the return on which the taxpayer deducts the “non-deducted eligible expenses.” The statement must be titled “Revenue Procedure 2020-51 Statement” and must include all seven of the following:
- The taxpayer’s name, address and social security number or employer identification number
- A statement specifying whether the taxpayer is an eligible taxpayer under either section 3.01 or section 3.02 of Revenue Procedure 2020-51
- A statement that the taxpayer is applying section 4.01 or section 4.02 of Revenue Procedure 2020-51
- The amount and date of disbursement of the taxpayer’s covered loan
- The total amount of covered loan forgiveness that the taxpayer was denied or decided to no longer seek
- The date the taxpayer was denied or decided to no longer seek covered loan forgiveness
- The total amount of eligible expenses and non-deducted eligible expenses that are reported on the return
If you have any questions about Revenue Procedure 2020-51, Revenue Ruling 2020-27 or your specific situation with regard to PPP loan forgiveness, contact Wipfli.