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.
The Honorable Eugene A. Ludwig, the 27th comptroller of the currency, is a business and civic leader and expert on banking, regulation, risk management and fiscal policy. Mr. Ludwig is managing partner of Canapi Ventures, a venture capital firm focused on investments in early to growth-stage fintech companies, and CEO of Ludwig Advisors, which counsels financial firms on critical matters. He is the founder and former CEO and chairman of Promontory Financial Group, where he was an IBM executive after the firm was acquired in 2016. He is also the founder and former CEO and chairman of Promontory Interfinancial Network (now IntraFi Network), an early fintech company with approximately 3,000 bank members. Under his leadership, the Promontory family of companies became synonymous with excellence in compliance, risk management and financial services innovation.
In 2019, Mr. Ludwig founded the Ludwig Institute for Shared Economic Prosperity, or LISEP, a nonprofit organization dedicated to improving the economic well-being of middle- and lower-income Americans. Its research includes new economic indicators for unemployment, earnings and cost of living. LISEP's statistics aim to provide policymakers and the public a more transparent view into the economic situation of all Americans as compared with traditional metrics. He co-founded the Carol and Gene Ludwig Family Foundation, which provides grants to organizations that accelerate medical and scientific discovery in neurodegenerative diseases and enable access to educational and economic opportunity for young people.
Mr. Ludwig was previously vice chairman and senior control officer of Bankers Trust New York Corp., then the fifth largest U.S. banking organization. He was instrumental in steering the firm through its landmark merger with Deutsche Bank.
As comptroller from 1993 to 1998, Mr. Ludwig served as the Clinton administration's chief banking regulator and point person on the policy response to the credit crunch of the early 1990s. He fashioned an 11-point plan that was instrumental in ending the crunch and helping banks begin to lend again and fulfill their role of supporting the economy. He modernized and revised the bank regulatory framework, leading a multi-agency effort to overhaul the Community Reinvestment Act. Under his purview, lending to low- and moderate-income Americans increased tenfold, as did national bank investments in community development corporations. He brought the first fair-lending case in the nation and over the course of his leadership, 27 cases in all, resulting in tens of millions of dollars in fines against violators.
While he was comptroller, Mr. Ludwig served as chairman of the Federal Financial Institutions Examination Council, a member of the Basel Committee on Banking Supervision, a director of the Federal Deposit Insurance Corporation and chairman of the Neighborhood Reinvestment Corporation.
Mr. Ludwig was previously a partner at Covington & Burling, specializing in banking law. He has been a guest lecturer at multiple colleges and universities, including Yale and Harvard's law and business schools and Georgetown's International Law Institute.
Given his unique perspective as a regulator, lawyer, banker, business leader and trusted advisor to leading financial institutions, he is a sought-after thought leader. His pieces have been published in The Financial Times, The New York Times, The Atlantic, The Wall Street Journal, The Washington Post, Politico, Democracy Journal, American Banker, Time, Newsweek, Bloomberg, and on CNBC.com. His book, "The Vanishing American Dream," was published in September 2020.
Gene was born in Brooklyn, New York, and raised in York, Pennsylvania. He graduated magna cum laude from Haverford College and received a scholarship to Oxford University, where he earned a Master of Arts degree as a Keasbey Fellow. He earned a J.D. from Yale University, where he was editor of the Yale Law Journal and chairman of Yale Legislative Services.
Ira S. Rosenbloom is chief operating executive of Optimum Strategies, which improves the performance, profitability and succession options of small and midsized accounting practices across the Mid-Atlantic region.
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.”
