IRS Guidelines on Deducting Expenses Paid with P3 Loan Proceeds – Update | Dickinson, Mackaman, Tyler and Hagen, CP
UPDATE – ON DECEMBER 21, 2020, THE CONGRESS ANNOUNCED A NEW STIMULUS PACKAGE WHICH WILL ALLOW THE ENTIRE DEDUCTION OF EXPENSES PAID WITH THE PROCEEDS OF A PPP LOAN.
During the week of November 20, the IRS issued two decisions, Decision on revenues 2020-27 and Income procedure 2020-51 provide advice to taxpayers who have received Paycheck Protection Program (P3) loans.
Although the forgiveness of a PPP loan is not taxable, expenses paid with the proceeds of a forgiven loan are not deductible. The analysis below assumes that taxpayers report their income on a calendar year basis. Taxpayers in the fiscal year would apply the same rules, but the dates would change.
Decision on revenues 2020-27 clarifies that taxpayers who received a PPP loan in 2020 cannot deduct expenses paid with the proceeds of that loan if, at the end of 2020, the taxpayer reasonably expects to receive a forgiveness of the loan, even if did not request the forgiveness by December 31, 2020. This essentially means that you are treating the loan as a forgiveness if, in fact, you reasonably expect it to be forgiven.
Income procedure 2020-51 then provides guidance on what the taxpayer must do to claim these deductions if it is subsequently determined that the PPP loan will not be canceled. In this case, the taxpayer has two options – he can claim the expense deductions on the 2020 tax return when it is filed, or on an amended 2020 return, or the taxpayer can claim the deductions on the return filed for the tax return. year in which it is determined that the loan will not be canceled.
In practice, the two stops work together as follows:
- A taxpayer who reasonably expects the PPP loan to be canceled at the end of 2020 would not deduct expenses paid with the proceeds from the PPP loan in the 2020 return – unless before filing that return it is determined that the PPP loan will not be canceled, in which case the expenses could be claimed on that original statement.
- If the return has already been filed, the taxpayer has the choice of claiming these expenses in an amended 2020 return, or alternatively, the taxpayer can claim the expenses in the income tax return for the year in which it is determined that the remission is refused (or the taxpayer decides not to request the remission), most likely the declaration of tax year 2021.