As expected based on chatter over the last few days, the IRS finally issued a Revenue Ruling today (Rev. Rul. 2020-27) denying any taxpayer the ability to deduct expenses “forgiven” under the PPP loan program incurred in 2020. This applies even if you wait until 2021 to ask for forgiveness.
As mentioned previously their logic being that the taxpayer reasonably expects to receive loan forgiveness, therefore, the expenses are non-deductible since the loan forgiveness is tax-free.
It appears that Treasury would like for taxpayers to apply for forgiveness as quickly as possible. Waiting until 2021 still makes sense since you will be able to determine the optimum amount and mix of expenses to ask forgiveness for.
For example, under Section 199A (the 20% QBI deduction), you may need wages in order to fully deduct the 199A deduction. In this case, you would want to only apply forgiveness on 60% wages and 40% other costs. However, if you are a farmer who sells to a cooperative, you may want to reduce wages in order to maximize your QBI deduction. You may not know any of these answers until after year-end when you can review your return data. Also, if you are subject to the business interest limitations, disallowing interest expense as the 40% component may provide additional tax savings (if interest is at least that amount).
At that point, you can then fill out your application and only provide expenses sufficient to get full forgiveness. The application does not require you to provide all expenses incurred during the covered period, but rather only those needed to get forgiveness. You have all the flexibility and control after year-end, not before.
The IRS also issued Revenue Procedure 2020-51 granting a safe harbor to allow certain taxpayers who reasonably know that they will not get full forgiveness or will not apply for forgiveness to allow a deduction on the 2020 tax return limited to those amounts. You will formally disclose this when you file the return.
We still do not necessarily agree with their logic, however, this is now a formal Revenue Ruling which means taxpayers should follow the rules. However, this ruling may mean nothing if Congress passes further stimulus that provides for the expensing of these same expenses. It would be nice if this passes soon, otherwise over $150 billion of stimulus liquidity that almost all taxpayers expected when they received their PPP loan will disappear. Is that what Congress intended? We shall find out (hopefully by year-end).