The Latest from the IRS

Two very important items were released by the IRS on November 18, 2020 that impact taxpayers with PPP Loans.

In Ruling 2020-27, the IRS restates that expenses paid with PPP funds will not be deductible in 2020 if the taxpayer has a reasonable expectation of reimbursement (forgiveness) of the PPP loan.

This ruling applies to loans forgiven in 2020 or in future periods.

IRS Revenue Ruling 2020-27

“A taxpayer that received a covered loan guaranteed under the PPP and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the CARES Act may not deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.” 

Within IRS Revenue Procedure 2020-51, the IRS provides a Safe Harbor for taxpayers that are not granted forgiveness in 2021 or who decide to forego requesting forgiveness in 2021. 

In these cases, the expenses may be considered deductible. The requirements are:

  • The taxpayer applied for forgiveness in 2020 but is notified in the subsequent year that all or part of the loan forgiveness is denied; OR
  • The taxpayer does not apply for forgiveness in 2021 but irrevocably decides not to seek forgiveness of all or part of the PPP loan.

 IRS Revenue Procedure 2020-51

“This revenue procedure provides a safe harbor allowing a taxpayer to claim a deduction in the taxpayer’s taxable year beginning or ending in 2020 (2020 taxable year) for certain otherwise deductible eligible expenses, as defined in section 2.03 of this revenue procedure, if (1) the eligible expenses are paid or incurred during the taxpayer’s 2020 taxable year, (2) the taxpayer receives a loan (covered loan) guaranteed under the Paycheck Protection Program (PPP) authorized under section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)), which at the end of the taxpayer’s 2020 taxable year the taxpayer expects to be forgiven in a taxable year after the 2020 taxable year (subsequent taxable year), and (3) in a subsequent taxable year, the taxpayer’s request for forgiveness of the covered loan is denied, in whole or in part, or the taxpayer decides never to request forgiveness of the covered loan, as described in section 3 of this revenue procedure.” 

The Latest from the SBA

On October 26, 2020, Form 3509 Loan Necessity for Profit and Form 3510 Loan Necessity Non-Profit were released in draft form and are still in the 30-day comment period. 

Once approved, the two forms will be used to gather information on borrowers who together with affiliates have over $2MM in PPP loans. 

The forms require borrowers to provide information in two categories:

Business Activity Assessment

This section asks for information such as Q2 2020 Revenues as compared to Q1 2020 and Q2 2019.

There are also questions related to whether the company was required to shut down or otherwise modify activity levels due to the pandemic.

Liquidity Assessment

This section includes questions around cash and cash equivalents on the last day of the quarter before the PPP loan.

There are also questions about prepayment of loans, highly compensated employees, and cash distributions to owners. 

Lenders have already begun to release the forms to their borrowers due to the anticipated 10-day completion timeline that the borrower will have to fulfill.

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