SBA PPP: IRS Provides Safe Harbor

Last Friday, we published an article summarizing Revenue Ruling 2020-27, which prevented taxpayers from taking a deduction for expenses paid using Paycheck Protection Program (“PPP”) funds in the year 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.” The IRS specified that this result would not change even if the taxpayer waited until 2021 to submit an application for forgiveness.

Since publication, the IRS released Revenue Procedure 2020-51, which provides a safe harbor allowing a taxpayer to claim a deduction in 2020, if the taxpayer can satisfy each of the following:

1. The eligible expenses are paid or incurred during the taxpayer’s 2020 taxable year;
2. The taxpayer received a PPP loan, 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; and
3. In such subsequent taxable year, the taxpayer’s request for forgiveness of the covered loan is denied, in whole or in part, or the taxpayer decides not to request forgiveness of the covered loan.

The Revenue Procedures provides that such deductions may be made on the 2020 original tax return, an amended return, an administrative adjustment request under Section 6227 of the Code, or the 2021 original tax return.

While the IRS did not detail what would constitute a “reasonable expectation”, the fact that a PPP borrower submits a forgiveness application would seem to indicate that the PPP borrower believes a reasonable expectation exists for forgiveness.  Presumably, if all or a portion of a PPP loan is not forgiven until after a PPP borrower files its income tax return, the PPP borrower could amend its 2020 income tax return to take deductions that were incurred with PPP loan proceeds that were not forgiven.

This Revenue Procedure appears to resolve the situation where a taxpayer does not take deductions for 2020, pursuant to Revenue Ruling 2020-27 based on its reasonable expectation, but is later denied forgiveness.           

When analyzing eligibility, compliance, or other issues related to the PPP loans, both lenders and borrowers should ensure they have consulted the proper sources. If you have any questions regarding the SBA PPP loans, or other aspects of the CARES Act, please contact a Baird Holm LLP attorney.