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.
Jim Buttonow, CPA, CITP, has been a leader in helping taxpayers and tax professionals resolve tax problems with the IRS. For 19 years, he worked at the IRS in various compliance enforcement positions. Since 2006, he has been in private practice and tax and accounting software development. Buttonow served as chairperson of the IRS Electronic Tax Administration Advisory Committee in 2015 and 2016 and as the North Carolina representative on the IRS' Taxpayer Advocacy Panel from 2020-2022. He regularly speaks on areas of tax administration and problem solving to national associations and has testified before Congress in areas of tax administration. He has also published many articles in industry publications, and currently authors the Tax Problems and Solutions Handbook," a publication aimed at helping tax pros work more effectively in post-filing matters and resolving their clients' most common tax problems. Reach him at Jim@ButtonowCPA.com or at buttonowcpa.com.
Linda Strab Jones is the Director of Market Planning for Compliance Products with LexisNexis Risk Solutions
Robert Reid is the chief executive officer of cloud-based accounting and business software provider Intacct. He served most recently as president and CEO of LucidEra, a provider of on-demand business intelligence. Prior to that, he was group vice president of industry-leading Siebel CRM On Demand for Oracle Corporation, managing the SMB sector. As president and CEO of on-demand CRM innovator UpShot, Rob grew the company tenfold before it was acquired by Siebel. He has also served as president of Concur Commerce Network, an e-marketplace for small to mid-sized businesses, and also as president and CEO of Seeker Software. Rob was a vice president at Documentum, a document management software company. He has also held executive management positions at Octel Communications, NBI, and Zenith Data Systems.
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.”
