The Internal Revenue Service and the Treasury Department released guidance Wednesday on claiming deductions for expenses associated with Paycheck Protection Program loans that have been forgiven.
The guidance in Revenue Ruling 2021-02 also reverses previous guidance issued last year by the IRS and the Treasury when Treasury Secretary Steven Mnuchin fiercely opposed the ability to deduct expenses related to forgiveness of PPP loans. Industry groups, including the American Institute of CPAs, lobbied for the ability to write off such expenses, arguing it would help struggling businesses and was in line with congressional intent when the CARES Act was passed last year setting up the PPP loans as a way to get money quickly into the hands of desperate business owners. The latest coronavirus relief bill included a provision that allows the expenses to be deductible and revives the PPP with a fresh round of $284 billion in funding. It will allow expenses related to seeking forgiveness of the Small Business Administration-backed loans to be deducted by businesses that received the loans, so businesses will be able to engage accountants to help with the task of applying for PPP loan forgiveness.
Wednesday’s revenue ruling reflects some of the changes to the tax laws that were included in the COVID-related Tax Relief Act of 2020, which was enacted as part of the Consolidated Appropriations Act of 2021, signed into law on Dec. 27, 2020. The COVID-related Tax Relief Act of 2020 amended the CARES Act to specify that no deduction would be denied, no tax attribute would be reduced, and no basis increase would be denied by reason of the exclusion from gross income of the forgiveness of an eligible recipient’s covered loan. The change applies for tax years ending after March 27, 2020.
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Nate Fleming works as an analyst at Forrester Research on the CIO team, covering software and services that enable the product development organization. He writes research for business-minded CIOs, CTOs, VPs of product development, and VPs of engineering who are seeking software and services support in an era of democratized product development that requires modern product development methodologies, cross-functional collaboration, as well as data-driven processes and product design. Nate has done extensive research, inquiry, and advisory covering the dynamics of the product lifecycle management (PLM) software market and the software product development services market, rounding out a coverage area that seeks to enable stakeholders bringing both physical and digital products to market.
Nate’s recent research at Forrester focuses on the democratization of the PLM software space, including a TechRadar™ that covers the range of technology functionalities that comprise the PLM software suite today and over the next five years. His software product development services coverage includes a Forrester Wave™ evaluation that outlines how services partners are helping customers implement customer-facing digital platforms that put software at the center of their brand. These two spaces coalesce in Nate’s research on the convergence of physical and digital product development and what that means for organizations looking to create or integrate with internet-of-things (IoT)-enabled products.
Previous Work Experience
Prior to becoming an analyst, Nate was a researcher and senior research associate on the application development and delivery (AD&D) and CIO teams.
Education
Nate holds a B.A. in history from Ithaca College.
Antonis Papatsaras is chief technology officer at SpringCM.
The new revenue ruling thus obsoletes the old guidance from the IRS and the Treasury last year in Notice 2020-32 and Revenue Ruling 2020-27, which said the PPP loan forgiveness expenses couldn’t be deducted. The obsoleted guidance disallowed deductions for the payment of eligible expenses when the payments resulted (or could be expected to result) in forgiveness of a covered loan, but that has been changed now in the new guidance.
“This law uncategorically says that all expenses that were paid to meet the requirements of having the PPP loans forgiven are now deductible,” said Evan Morgan, director of tax services at Kaufman Rossin, which does tax and accounting work for many professional services clients, including law firms and doctors’ offices. “That’s a very big deal, particularly because they weren’t sure how to plan for this because professional services firms are a little bit different than normal entities in that they like to pay out all of their profits in the form of salaries prior to the end of the year.”
Howard Wagner, a partner in the Washington national tax practice at Crowe, believes the IRS and the Treasury took the correct position last year on nondeductibility of PPP loan forgiveness expenses, but acknowledged it was politically unpopular and didn’t survive. However, there may be some extra complexity in accounting for the reversal on financial statements. “The interesting thing on the PPP is because the Service had said they were nondeductible, you had to account for them in your provision as if they were nondeductible,” he said. “And now you have to go back and adjust your provision for the fact that they will be deductible. That impacts the tax rate and that impacts your financial statement tax provision.”
