Tag Archives: deduction

IRS Releases Additional Guidance on Non-Deductibility of PPP-Funded Expenses

Last week, the Internal Revenue Service (“IRS”) issued two pieces of guidance—Revenue Procedure 2020-51 and Revenue Ruling 2020-27—reiterating its position that taxpayers cannot claim a deduction for any otherwise deductible expense if the payment of the expense results in forgiveness of a Paycheck Protection Program (“PPP”) loan and clarifying the tax treatment for business expenses where a PPP loan is not forgiven in the year received.  The IRS describes the guidance as follows:

  • Revenue Procedure 2020-51 provides a safe harbor allowing a taxpayer to claim a deduction in the taxpayer’s 2020 tax year (or the subsequent year) for certain otherwise deductible eligible 2020 expenses if (1) the taxpayer incurred eligible PPP expenses in 2020 and, after applying for PPP loan forgiveness, the taxpayer is denied that forgiveness, in whole or in part, in a subsequent year or (2) the taxpayer decides not to request PPP loan forgiveness in a taxable year after 2020.  In those situations, the taxpayer can deduct some or all of the expenses on (1) a timely filed (including extensions) original tax or information return for the 2020 tax year, (2) an amended 2020 return or administrative adjustment request, or (3) a timely filed original tax or information return for the subsequent tax year; and
  •  Revenue Ruling 2020-27 provides that a taxpayer that received a PPP loan and that paid or incurred certain otherwise deductible expenses cannot deduct those expenses in the tax year in which the expenses were paid or incurred if, at the end of that tax year, the taxpayer reasonably expects to receive forgiveness of the covered loan based on the otherwise deductible expenses. This includes situations where the taxpayer (1) has applied for loan forgiveness but has not been informed by the lender by the end of 2020 whether the loan will be forgiven and (2) has not applied for loan forgiveness by the end of 2020 but has satisfied all requirements for forgiveness and knows the amount of expenses that qualify for loan forgiveness.

These two pieces of guidance follow IRS Notice 2020-32, released this past late April, in which the IRS first announced that no deduction is allowed for an expense if the payment of that expense results in forgiveness of a PPP loan.  As we have said before, we disagree with the IRS’s position, in part because it obviates the “tax free” forgiveness of the loan.

More than one-third of the United States Senate has co-sponsored a bill that would make clear that deductions for ordinary business expenses (and other tax attributes) are unaffected by PPP loan forgiveness, but Congress has not enacted any clarifying legislation into law.  

IRS Issues Small Business Tax Reform Regulations, Clarifies Combinations of Business Entities

The tax reform legislation Congress passed in December left many details unanswered, especially regarding the small business tax benefit giving some businesses a twenty percent deduction against their income if the businesses satisfy certain employee payroll and property ownership thresholds. On August 8, the Internal Revenue Service issued proposed regulations attempting to address many of the open questions.

One of the biggest questions was whether taxpayers can treat employee payroll and property owned across multiple business entities (like corporation and limited liability companies) as a single combined business for the purpose of satisfying the employee payroll and property ownership tests.

For most types of businesses, the regulations generally would allow aggregation of property and payroll amongst different entities (such as partnerships and S corporations) if the same group of persons own the majority of the business for the majority of the year, the entities satisfy certain integration and interdependence tests, and the taxpayers follow specified filing procedures.

Those rules will not apply to most professional businesses, which are subject to limitations in the use of the small business deduction. These businesses are subject to rules forcing aggregation of income to prevent circumvention of the deduction limitations.

The rules are not fully binding until finalized, but IRS will apply the anti-abuse rules retroactively. Taxpayers can rely on these proposed rules until they are finalized.

We will provide more perspective on these important new rules soon. In the meantime, for more details, you can read the proposed regulations at irs.gov.

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037