The subject of taxability of Paycheck Protection Program (PPP) loan forgiveness has been a common theme of many of our past PPP communications with you. Some information, such as the fact that the eligible expenses that lead to forgiveness are not deductible, has not changed, and will not change absent an act of Congress.
However, based on Revenue Ruling 2020-27, the IRS has provided clarity on one additional piece of information, the timing of when the expenses are considered non-deductible.
The IRS has said, through this Revenue Ruling, that taxpayers must disallow PPP-related eligible deductions in the tax year the expenses are incurred if the taxpayer has a reasonable expectation of forgiveness of a PPP loan.
This fact holds true even if the taxpayer has not yet submitted for forgiveness by the end of the tax year.
For calendar-year taxpayers, this ruling is relatively cut-and-dried. If you are a calendar year taxpayer and are expecting forgiveness of a PPP loan, your expenses are not deductible in 2020. For fiscal year taxpayers, there could be some complexity, especially if you did not incur the totality of your eligible expenses by the end of your fiscal year. If you have a covered period that extends beyond the end of your fiscal year, please consult your Walz Group contact to discuss this matter further.
The Revenue Ruling makes no distinction between loans over $2,000,000 and those under $2,000,000. So, the mere presence of the additional documentation required with the forgiveness application for loans over $2,000,000 (SBA Form 3509 or 3510) does not impact the ruling. However, if the contents of the SBA’s Loan Necessity Form leads a taxpayer to believe that forgiveness is not reasonable, then there would remain some uncertainty about the timing of deductibility of expenses.
This ruling makes it imperative that we review together your fourth quarter estimated tax payments and related safe harbors to avoid underpayment penalties.
Walz Group is here to assist you with all aspects of the PPP loan program. Please reach out to your Walz Group professional with any questions or assistance needs.