On November 18, the IRS circulated income Procedure 2020-51, which supplies a safe harbor guideline on each time a taxpayer can subtract expenses funded by having a PPP loan.

The harbor that is safe either if the SBA denies some or most of the loan forgiveness or if perhaps the taxpayer elects not to apply for loan forgiveness. Underneath the safe harbor, in the event that taxpayer follows the reporting requirements in part 4 of this income procedure, they could deduct otherwise allowable expenses as much as the quantity of PPP principal which is why loan forgiveness ended up being rejected or perhaps not looked for.

In the event that safe harbor will not use, then in many instances, under Revenue Ruling 2020-27, the costs won’t be deductible into the 12 months incurred.

The deductions is going to be permitted on some of the after:

The income procedure particularly covers the “2020 taxable 12 months” while the year that is“subsequent.” It’s reasonable to assume that the “2020 taxation year” should really be look over to suggest the taxation 12 months when the PPP eligible expenses had been compensated or incurred.

Let’s have a look at two examples:

Instance one

The taxpayer filed their loan forgiveness application in 2020, asking for a loan that is full 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 income tax return without using deductions for otherwise qualified company costs in the actual quantity of $200,000.

In 2021, they get notice from their lender that just $175,000 had been forgiven. Under this income procedure, the taxpayer has got the choice of amending their 2020 income income tax return (or filing an AAR) to subtract $25,000 of cost or claiming the $25,000 of costs on their 2021 income taxation return.

Example two

The taxpayer incurred $400,000 of qualified PPP expenses in 2020. At 12 months end, that they had perhaps maybe perhaps not filed their loan forgiveness application but anticipated to do this in 2021 in addition they had an acceptable expectation of getting loan forgiveness. With respect, with IRS income Ruling 2020-27, the taxpayer filed their 2020 income taxation return without using deductions for otherwise business that is qualified in the actual quantity of $400,000.

In 2021, the taxpayer changed their head and didn’t apply for loan forgiveness also to keep carefully the PPP funds as financing. Under this income procedure, the taxpayer gets the choice of amending their 2020 income income tax return (or filing an AAR) to subtract $400,000 of costs or claiming the $400,000 of costs to their 2021 income taxation return.

Reporting demands

Even though the need associated with the income procedure is debateable, due to the fact taxpayer would currently qualify to deduct business that is qualified, a number of reporting requirements in part 4 of this income procedure that might be a trap when it comes to unwary whom file or amend 2020 or 2021 earnings taxation statements without following these reporting rules.

Part 4 for the income procedure calls for that the taxpayer attach a declaration to your return upon that the taxpayer deducts the eligible that is“non-deducted.” The declaration must certanly be en en titled “Revenue Procedure 2020-51 Statement” and must add all seven regarding the after:

For those who have any concerns about income Procedure 2020-51, income Ruling 2020-27 or your certain situation in regards to PPP loan forgiveness, contact Wipfli.