AGC tax update: IRS issues guidance on nondeductibility of expenses associated with PPP loan forgiveness
In the latest setback in the administration of the Paycheck Protection Program (PPP), the Internal Revenue Service (IRS) announced this evening, via Revenue Ruling 2020-27 that expenses funded through a Paycheck Protection Program (PPP) loan are not deductible for this tax year if “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, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year”(emphasis added).
While the IRS ruled earlier this year (Notice 2020-32) that expenses associated with PPP loan forgiveness, such as wages, rent, utility payments, etc. were not tax deductible, it was assumed that the triggering event that would turn these deductible expenses into nondeductible expenses was being approved for loan forgiveness by the Small Business Administration (SBA). As a result, AGC heard from many accounting and consulting firms who were advising clients to delay applying for loan forgiveness until 2021 so as to maintain deductibility of these expenses while a legislative fix could be worked out in Congress and the Administration. IRS’s ruling this evening calls this strategy into question.
This ruling comes hot on the heels of the SBA recently receiving emergency approval from OMB to distribute a nine page “loan necessity questionnaire” (Form 3509) to PPP borrowers, via their lenders, who took out loans of $2 million and above. The questionnaire says that “[t]he information collected will be used to inform SBA’s review of your good-faith certification that economic uncertainty made your loan request necessary to support your ongoing operations” but does not say how the information in the questionnaire will be used.
Despite this ambiguity about how the SBA will evaluate loan forgiveness applications for loans greater than or equal to $2 million, the revenue ruling notes that “Section 1106(b), (d), and (g) of the CARES Act, and the supporting loan forgiveness application procedures published by the SBA, provide covered loan recipients like A and B with clear and readily accessible guidance to apply for and receive covered loan forgiveness” (emphasis added). Considering that the loan forgiveness questionnaire is currently a black box, with evaluation criteria known only to the SBA, deliberately not shared with the public or PPP borrowers, and knowing that the SBA and Treasury have left open the possibility that it may evaluate “other loans as appropriate,” (via FAQ 39) it’s hard to see how these two statements are not in conflict.
As for the outlook on a legislative solution to this mess, AGC is working with many coalition partners to try and get the PPP deductibility issue remedied before the end of the year. That said, the current outlook for any significant legislation to be passed during the lame duck is…not great. We will continue to fight for this to be included in any year end package, but it will be an uphill climb.
If you have any questions, please feel free to reach out to AGC staff.