Sarah Tso
Sarah Tso
IRS Update for PPP Loan Forgiveness

IRS Update for PPP Loan Forgiveness

In May 2020, the Internal Revenue Service (IRS) issued Notice 2020-32 stating all taxpayers who received a Payroll Protection Program (PPP) loan are not permitted to deduct eligible expenses, which are normally deductible, to the extent that the payment of those expenses resulted in the forgiveness of their PPP loan.

The eligible expenses allowed in the covered period to achieve forgiveness include:

  • payroll costs
  • interest on a covered mortgage obligation(s)
  • rent obligation(s) within the covered period
  • utility payments

Recently, the IRS has provided additional guidance under Rev. Ruling 2020-27, requiring all PPP loan recipients to report eligible expenses as non-deductible in tax year 2020. If the taxpayer has a reasonable expectation that their PPP loan will be forgiven, then the PPP eligible expenses, up to the amount of forgiveness, should be considered non-deductible. Even if the taxpayer has not submitted their forgiveness application or received their forgiveness decision by December 31, 2020, the PPP eligible expenses must still be reported as non-deductible on their 2020 tax return.

If the PPP loan, or a portion of the PPP loan, is determined to be unforgivable, or if the taxpayer decides not to apply for forgiveness in a later tax year, the IRS has issued safe harbor rules under Rev. Proc. 2020-51 allowing the taxpayer to deduct some or all the expenses.

The taxpayer can take this deduction in one of three ways:

  1. A timely filed (including extensions) original 2020 tax return,
  2. An amended 2020 tax return, or
  3. A timely filed (including extensions) original tax return for the subsequent tax year.

To qualify for safe harbor:
Attach a statement to the tax return titled "Revenue Procedure 2020-51 Statement". The attachment must contain the following:

  • The taxpayer's name, address, and Social Security number or employer identification number
  • A statement specifying whether the taxpayer is an eligible taxpayer under either Section 3.01 or Section 3.02:
    • Section 3.01 - A taxpayer is eligible if they meet all three conditions:
      1. The taxpayer paid or incurred eligible expenses in 2020 for which no deduction is allowed, and
      2. The taxpayer submitted their application for forgiveness before the end of the 2020 tax year, or as of the end of the tax year they intend to apply for forgiveness, and
      3. In a subsequent tax year, the lender notifies the taxpayer that forgiveness of all or part of their PPP loan is denied
    • Section 3.02 - A taxpayer is eligible if they meet both conditions:
      1. They meet the first two requirements of section 3.01, and
      2. In a subsequent tax year, the taxpayer decides not to seek forgiveness for some or all their PPP loan
  • A statement that the taxpayer is applying Section 4.01 or Section 4.02:
    • Section 4.01 - Safe harbor for deductions to be claimed in tax year 2020
    • Section 4.02 - Safe harbor for deductions to be claimed in a subsequent tax year
  • The disbursement date and amount of the taxpayer's loan
  • The total amount of forgiveness that the taxpayer was denied or for which they decided to no longer apply
  • The date the taxpayer was denied or decided not to apply for forgiveness and
  • The total amount of eligible expenses and non-deducted eligible expenses reported on the return

This new guidance is something all PPP loan recipients should keep in mind when starting their year-end tax planning. Although the PPP loan forgiveness amount is not taxable, the net effect will be an increase in taxable income by the amount of forgiveness. Taxpayers should plan under the assumption that the eligible expenses resulting in PPP loan forgiveness will not be deductible for tax year 2020.

If you need help, we are here for you. ADKF has an expert PPP team to assist you with PPP Loans and tax planning. We also have a Department of Tax Controversy that can review your documents or perform a mock audit if that is the level of reassurance you desire. Schedule an appointment using the button on the top right corner of our website or call us to learn more about our services: 210-829-1300.

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