On November 18, the IRS circulated income Procedure 2020-51, which offers a harbor that is safe on each time a taxpayer can subtract costs funded having a PPP loan.
The safe harbor applies either if the SBA denies some or most of the loan forgiveness or if perhaps the taxpayer elects not to declare loan forgiveness. Beneath the safe harbor, in the event that taxpayer follows the reporting requirements in part 4 of this income procedure, they are able to deduct otherwise allowable expenses up to the quantity of PPP principal which is why loan forgiveness had been rejected or otherwise not wanted.
In the event that safe harbor will not use, then generally in most situations, under Revenue Ruling 2020-27, the costs will never be deductible into the 12 months incurred.
The deductions is supposed to be permitted on some of the after:
The income procedure especially covers the вЂњ2020 taxable yearвЂќ in addition to вЂњsubsequent year.вЂќ It really is reasonable to assume that the вЂњ2020 taxation yearвЂќ ought to be look over to suggest the taxation 12 months where the PPP eligible expenses had been compensated or incurred.
LetвЂ™s have a look at two examples:
The taxpayer filed their loan forgiveness application in 2020, asking for a complete loan forgiveness of $200,000. The taxpayer had an expectation that is reasonable of loan forgiveness. Prior to IRS income Ruling 2020-27, the taxpayer filed their calendar year 2020 earnings taxation return without using deductions for otherwise qualified company costs in the quantity of $200,000.
In 2021, they get notice from their loan provider that just $175,000 had been forgiven. The taxpayer has the option of amending their 2020 income tax return (or filing an AAR) to deduct $25,000 of expense or claiming the $25,000 of expenses on their 2021 income tax return under this revenue procedure.
The taxpayer incurred $400,000 of qualified PPP expenses in 2020. At 12 months end, that they had maybe perhaps maybe perhaps not filed their loan forgiveness application but anticipated to achieve this in 2021 as well as possessed a fair expectation of getting loan forgiveness. In respect, with IRS income Ruling 2020-27, the taxpayer filed their 2020 income taxation return without taking deductions for otherwise business that is qualified in the actual quantity of $400,000.
In 2021, the taxpayer changed their head and do not apply for loan forgiveness and also to keep carefully the PPP funds as that loan. The taxpayer has the option of amending their 2020 income tax return (or filing an AAR) to deduct $400,000 of expenses or claiming the $400,000 of expenses on their 2021 income tax return under this revenue procedure.
Even though the need for the income procedure is dubious, because the taxpayer would currently meet the requirements to deduct business that is qualified, a number of reporting requirements in area 4 for the income procedure that may be a trap for the unwary whom file or amend 2020 or 2021 earnings taxation statements without following these reporting guidelines.
Part 4 regarding the income procedure calls for that the taxpayer attach a statement into the return upon that the taxpayer deducts the eligible that isвЂњnon-deducted.вЂќ The declaration must certanly be en en en titled вЂњRevenue Procedure 2020-51 StatementвЂќ and must consist of all seven regarding the after:
For those who have any queries about income Procedure 2020-51, income Ruling 2020-27 or your situation that is specific with to PPP loan forgiveness, contact Wipfli.