Schwabe Williamson & Wyatt
United States: Big News From IRS Regarding PPP Loan Forgiveness and Tax Expense Deductions
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On November 18, 2020, the US Department of the Treasury and the Internal Revenue Service (“IRS”) released long-awaited guidance regarding the tax treatment of certain expenses incurred in respect of loans obtained under the Paycheck Protection Program. (“PPP Loans”). For a discussion on PPP loans, please refer to our COVID-19 resources.
Regarding tax issues relating to the cancellation of PPP loans, the IRS previously issued Notice 2020-32 (the “Notice”) in which it noted that certain expenses would not be deductible, but left many unanswered questions. We have already discussed the Notice here.
In the newly issued guidelines, the IRS answered some of these unanswered questions. This orientation takes the form of a tax decision and a tax procedure.
Decision on revenues 2020-27
In Tax Decision 2020-27, the IRS outlined two factual assumptions. In the first scenario, the taxpayer paid otherwise deductible expenses – for example, labor costs, interest on a qualifying mortgage loan, utilities, and rents (collectively, “qualifying expenses”) – and obtained a loan. PPP. In November 2020, this taxpayer had requested a PPP loan forgiveness; however, the lender had yet to respond by the end of 2020.
In the second hypothesis, the taxpayer had also incurred eligible expenses but had not yet requested the cancellation of the PPP loan at the end of 2020. This taxpayer also satisfied all the other requirements relating to the cancellation. of the PPP loan.
After describing its previous guidelines (the Notice), the IRS notes that this is an area covered by the “tax benefit rule.” This rule provides that a taxpayer must take in his income an amount equal to a deduction made in a previous return if an event occurs which is fundamentally inconsistent with the basis on which the previous deduction was made. With this analysis in mind, the IRS returned to the two assumptions described above.
The IRS has ruled that in either case, taxpayers are not allowed to claim deductions for qualifying expenses on their 2020 tax returns. This revenue decision is important because it puts an end to questions about how to manage the deductibility of eligible expenses for the 2020 tax year, at least with respect to the two specific factual assumptions set out in the revenue decision. As other questions remain – for example, how to handle the deductibility of qualifying expenses in the event a lender refuses to cancel a PPP loan – the IRS has provided additional guidance in the form of a tax procedure.
Income procedure 2020-51
While the tax ruling denied the deductibility of certain amounts, the 2020-51 tax procedure provides a safe harbor for taxpayers to claim a deduction for those amounts if (1) eligible expenses are paid or incurred during the 2020 tax year of the taxpayer; (2) the taxpayer obtains a PPP loan which the taxpayer expects to be forgiven; and (3) in a subsequent tax year, (i) the lender rejects the taxpayer’s request for forgiveness, or (ii) the taxpayer irrevocably decides never to request forgiveness of the taxpayer’s PPP loan.
Subject to a limitation and a reporting requirement (each described below), a Safe Harbor taxpayer is permitted to deduct otherwise non-deductible expenses (1) on the taxpayer’s timely return, including extensions, original 2020 statement or amended statement; or (2) on a tax return for a subsequent tax year. A taxpayer who requests this relief is not permitted to deduct an amount of otherwise non-deductible expenses in excess of the principal amount of the taxpayer’s PPP loan for which the remission has been denied or will never be claimed.
In order to claim a deduction, the taxpayer is required to attach to the taxpayer’s declaration a declaration entitled “Declaration of the tax procedure 2021-51” which must include:
(1) The name, address and social security number or employer identification number of the taxpayer;
(2) A declaration specifying the grounds for eligibility;
(3) A declaration for the deduction year requested by the taxpayer;
(4) The amount and date of disbursement of the PPP Loan from the taxpayer;
(5) The total amount of the cancellation of the PPP loan that the taxpayer has been refused or will never request;
(6) The date on which the taxpayer was refused or decided never to ask for forgiveness; and
(7) The total amount of eligible expenses and eligible non-deductible expenses that are declared in the taxpayer’s return.
By issuing Tax Decision 2020-27 and Tax Procedure 2020-51, the IRS has answered a number of questions relating to when taxpayers are not permitted to claim expenses otherwise deductible on the basis of existence. of a PPP loan, as well as how and when to claim these deductions if the cancellation of the PPP loan is refused or if the taxpayer irrevocably decides not to request the cancellation of the PPP loan.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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