The IRS issued Revenue Ruling 2020-27 that addresses when a borrower should exclude the expenses used to obtain forgiveness of their payroll protection program loan. In short, for a calendar year taxpayer, the expenses are non-deductible in 2020. The ruling does not address fiscal year taxpayers, nor does it address how to allocate the non-deductible expenses among the various expenses used for loan forgiveness. However, there are clues in the ruling as to how taxpayers can proceed.
First, let’s address calendar year taxpayers, since that is the group the ruling specifically addresses. The reason why the expenses are not deductible in 2020 is that the borrower has a reasonable expectation that the loan will be forgiven. The ruling specifically indicates that it does not matter if a borrower has applied for forgiveness or not; the expenses are nondeductible in 2020.
Keep in mind, only the amount of the loan that is forgiven results in nondeductible expenses. Therefore, if a borrower only has partial loan forgiveness, only the expenses used for the part that is forgiven are nondeductible.
Second, let’s address fiscal year taxpayers, since there is information in the ruling that helps us reach a reasonable conclusion. Because the reasoning within the ruling indicates that the borrower has a reasonable expectation of the loan being forgiven, it follows logically that a fiscal year taxpayer would look at when it incurred the expenses used for loan forgiveness. Two key aspects of this analysis are the date the PPP loan was received, and the fiscal year end of the taxpayer.
For example, assume a September year-end and an April loan date. It is likely that most if not all of the expenses were incurred between April and September and should be nondeductible on the September 2020 fiscal year end tax return.
Now let’s assume that the loan proceeds were received in July and there is a September year end. It’s likely that the expenses used for loan forgiveness would span multiple tax years. It seems reasonable that an allocation of the expenses between the two tax years would be acceptable. Note, there is no guidance specifically indicating this is acceptable.
Regarding the allocation of expenses used for loan forgiveness, there are still many unknowns. For most taxpayers, this may not matter at all. Whether wages, employee benefits, rent, utilities, or interest are reduced may not matter. However, for taxpayers with a research and development credit, or who receive a qualified business income deduction, the allocation to wages will definitely matter. We advise our clients to plan for various possibilities, and remain patient for future guidance.
We have learned two basic truths during the twists and turns within the payroll protection program. The first is that patience has usually been the most prudent path forward. The second is to not make an irreversible decision until it is absolutely necessary. Keep both of these in mind as you plan for the various outcomes of the PPP program.
If you have any questions, we encourage clients to ask your Marcum professional. If you are not a client, we encourage you to reach out to us. Our goal is to provide information for businesses to succeed through this pandemic. It’s our little part to help you continue on and we’re happy to help.