Payroll Protection Program (P3) loans are eligible for a rebate depending on whether or not the loan proceeds are used for eligible business expenses. One of the advantages of this program is that there is no taxable income for the borrower upon surrender of the loan. While many borrowers expected to deduct business expenses as would be the case if there had not been a PPP loan, the position of the US Department of the Treasury (Treasury) has been that PPP expenses result in a loan forgiveness cannot be deducted for federal income tax purposes. due to the rule on tax benefits under Article 265 of the Code. See the discussion of Notice 2020-32 in our previous one On the subject here. A PPP loan can generally be used for salary costs, interest on mortgage bonds, rent, and utilities, which may or may not qualify for loan forgiveness under the rules and guidelines of the US Small Business Administration ( SBA). Other types of expenses that can be paid with PPP loans, such as interest on other types of existing debt securities, cannot qualify for loan forgiveness.

IN DEPTH

There was a discussion after Notice 2020-32 as to whether Section 265 applies to deny a tax deduction for PPP expenses incurred in 2020 if the loan forgiveness request is not filed. at the end of the year. Practitioners have questioned whether Section 265 could apply to P3 expenditures when the eligibility for the P3 loan and the extent to which the P3 loan would be canceled were not established before the end of the tax year. Among other things, a PPP loan can be used for expenses that are not eligible for loan forgiveness, and the amount of loan forgiveness can be reduced under complicated rules that remain unclear.

In Rev. Rul. 2020-27, however, the Treasury reiterated its position in concluding that the tax benefit rule applies to PPP expenses paid with the proceeds of a PPP loan, regardless of when the PPP loan is canceled as long as the taxpayer is A reasonable expectation that the loan proceeds will be used to pay for PPP expenses will eventually be forgiven. The Internal Revenue Service (IRS) says in this ruling that the timing of the loan cancellation is irrelevant because section 265 (a) determines whether a deduction is attributable to a category of tax-exempt income, regardless of whether this income is received or accrued. Many employers who have struggled to understand the constantly evolving rules of PPP may find it particularly annoying that this decision describes existing loan cancellation procedures as “clear and easily accessible directions.” If it turns out that a taxpayer paid or incurred PPP expenses in the 2020 tax year for which no deductions are allowed because, at the end of the 2020 tax year, the taxpayer reasonably expects to receive loan forgiveness, but the taxpayer is unable to subsequently obtain full or partial loan forgiveness, there is a supplemental income procedure that provides a “safe harbor” “Under which a taxpayer can claim a deduction in 2020 or in a subsequent year (see here).

The Treasury’s position in Opinion 2020-32 and Revenue Decision 2020-27 has been strongly criticized by employers, practitioners and key legislators who participated in the enactment of the CARES law on aid, relief and economic security, including Senate Finance Committee Chairman Chuck Grassley. (R-Iowa), Ranking Member Ron Wyden (D. Ore) and Ways and Means Committee Chairman Richard E. Neal (D-Mass). While the CARES Act did not expressly address the application of the tax benefits rule, the Treasury’s position in pushing for a questionable interpretation is puzzling. In particular, it is not clear why Congress would only have provided tax exemptions when a tax deduction for many taxpayers might be more attractive from a cash flow perspective, especially taking into account that the taxpayers may have relied on these deductions when determining the estimated tax for 2020 payments.

Relief seems to be on its way to Congress. On December 14, lawmakers unveiled a 2020 COVID emergency bipartisan bill, which includes a provision allowing deductions for PPP expenses that result in a PPP loan forgiveness. The bill would provide, in the relevant part, that “[N]o the deduction will be refused or reduced, no tax attributes will be reduced, and no base increase will be refused, due to the exclusion of gross income [of the forgiveness of PPP loans]. As the name suggests, the bill has received bipartisan support. In addition, Congress will have to take some by December 18 to avoid a federal government shutdown. Nonetheless, unless relief is enacted, taxpayers should calculate estimated taxes knowing that the IRS will likely dispute the deductibility of expenses paid with the proceeds of the PPP loan and knowing that they may need to adjust their taxes. calculations depending on whether or not relief has passed this session.