On November 18, 2020, the IRS released Revenue Ruling 2020-27, which outlines the treatment of the loan proceeds that a business expects to be forgiven. Prior to the release of this Revenue Ruling, businesses expected to expense 100% of their business expenses, that were covered by the PPP Loan, on their 2020 tax returns and deferring the reduction until 2021 or 2022; at which time they would expect to receive their Loan Forgiveness Letter from their lender.
Revenue Ruling 2020-27 states that if a business reasonably expect to receive forgiveness for 100% of the PPP Loan, the business may not deduct those business expenses in the year that were paid or incurred. This rule applies to all businesses that received PPP Loan funding, whether they have applied for loan forgiveness to the lender or not. Under Section 1106(b) of the CARES Act, a business may not deduct those expenses in the taxable year in which they were paid or incurred, if at the end of the taxable year the business reasonably expects to receive forgiveness of the covered loan.
A Safe-Harbor Provision exists for amounts that the business reasonably expects not to be forgiven. The amounts that will not be forgiven can be excluded for the expense reduction.
As a result of this Revenue Ruling, businesses should incorporate the amount of their PPP Loans that they can expect to be forgiven into their tax planning calculations and projections. This will avoid any unpleasant surprises in additional tax liability.
Our experienced tax professionals are available to assist with all your tax planning. If you would like additional information, please contact us.