On November 18, 2020, the IRS and Treasury Department released some much-anticipated guidance (Revenue Ruling 2020-27 and Revenue Procedure 2020-51) that, among other things, reaffirmed that businesses will not be able to deduct expenses paid for with proceeds from a loan that is forgiven under the SBA’s Paycheck Protection Program (PPP). While it was initially thought that, by delaying the loan forgiveness application (and therefore the PPP loan forgiveness) until 2021, calendar-year taxpayers would be able to push the nondeductible event into 2021, the IRS has now affirmatively stated that, if there is a reasonable expectation of forgiveness (even if that forgiveness will not take place until a subsequent tax year), borrowers are not permitted to take the deductions in 2020.
The newly released guidance also provides that if a taxpayer does not take the deductions in 2020, in accordance with the above, and the full amount of the PPP Loan is not forgiven or the taxpayer chooses not to apply for forgiveness, then such taxpayer can either amend its 2020 return to take the deductions and/or take the deductions on a timely filed return for its 2021 tax year.
There is, however, a glimmer of hope for small business owners. Many members of Congress, including high-ranking members on each side of the aisle, have disagreed with the IRS’ position on the basis that it is inconsistent with the intent of the Coronavirus Aid, Relief and Economic Security (CARES) Act. That being said, the
IRS has maintained its position that legislative action is needed to permit the deductibility of those expenses. Unfortunately, most small businesses soon will be addressing their 2020 tax results as they contemplate year-end distributions and required tax estimates and/or tax returns. So there is a sense of urgency here, and Congress will need to act in the near term to address the issue.
As of this writing, a legislative proposal that would allow for deductibility of these expenses – SB 3612 or the "Small Business Expense Protection Act of 2020" – is currently pending in the Senate and could still pass this year. This bipartisan legislation is sponsored by several Senators who sit on the Senate Finance Committee, which has jurisdiction over the IRS. Similar legislative initiatives also are pending in the House.
Additionally, the recent IRS guidance described above has prompted business interests to further coalesce around the need for Congress to address this deductibility concern and related PPP loan issues. Eighty trade and business groups sent letters to U.S. Treasury Secretary Mnuchin (who has historically opposed the deductibility of expenses paid for from proceeds from a forgiven PPP loan) and SBA Administrator Jovita Carranza
and also to U.S. House and Senate leaders expressing concern that the "Loan Necessity Questionnaires" for nonprofit and for-profit Borrowers, circulated by the SBA to certain PPP loan recipients who received loans in excess of $2 million, are both confusing and burdensome and could lead to inappropriately questioning thousands of qualified PPP loans made to struggling businesses. The letters request that the agencies and Congress consider temporarily suspending the use of the questionnaires while the issues raised are addressed.
Calfee's Federal Government Relations Team in collaboration with the Corporate and Capital Markets Group members are continuing to monitor the above issues and are talking with legislative leaders about the importance of loan forgiveness to small businesses. We will continue to provide updates.