The Internal Revenue Service (IRS) recently issued a Revenue Ruling, a Revenue Procedure and a series of frequently asked questions (FAQs) posted on the IRS website addressing open questions regarding Paycheck Protection Program (PPP) loans.
- Revenue Ruling 2020-27 reaffirms, despite strong criticism from Congressional lawmakers, the position taken by the IRS in Notice 2020-32 that taxpayers are not allowed to deduct expenses paid with proceeds of PPP loans if such loans are expected to be forgiven.
- Revenue Procedure 2020-51 permits taxpayers to claim deductions for amounts paid using PPP loan proceeds in certain circumstances where part or all of such PPP loan is not forgiven.
- The IRS FAQs regarding the interaction of employee retention tax credits (ERTCs) and PPP loans, have been expanded to address considerations raised by common acquisition transactions. Generally, under the FAQs, employers are not precluded from claiming ERCTs solely as a result of acquiring a business that obtained a PPP loan.
The guidance, and considerations for taxpayers, are discussed in greater detail below.
I. CARES Act, PPP loans and the ERTC
The Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act) was enacted in March as part of an ongoing effort to combat the financial crisis arising from the COVID-19 pandemic. Making available forgivable PPP loans through the Small Business Administration (SBA) and refundable tax credits in the form of ERCTs to businesses were two key components of the CARES Act’s relief efforts.
Specifically, section 1102 of the CARES Act expanded the existing SBA Section 7(a) loan program to provide 100% federally-backed loans to eligible businesses (i.e., PPP loans). Under the CARES Act, PPP loans are eligible for loan forgiveness subject to certain conditions, including that the taxpayer incurs payroll and certain other qualifying operating expenses. The CARES Act provides that the amount of the loan forgiveness is not included in the taxpayer’s gross income for US federal income tax purposes.
In addition, section 2301 of the CARES Act provides the ERTC as a refundable payroll tax credit for 50% of certain “qualified wages” paid by employers to employees during the COVID-19 crisis. The ERTC is available to employers whose: (1) operations were fully or partially suspended, due to a COVID-19 related shutdown order, or (2) gross receipts declined by more than 50% when compared to the same quarter in the prior year. The ERTC is provided for wages paid or incurred from March 13, 2020, through December 31, 2020.
If an employer, or any entity in its aggregated group as defined in section 2301(d) in the CARES Act, receives a PPP loan, the employer is not eligible for the ERTC.
II. Rev. Rul. 2020-27 and Rev. Proc. 2020-51: Limited deductibility of expenses where PPP loan is forgiven
In Rev. Rul. 2020-27, the IRS doubled down on the position it took in Notice 2020-32, with respect to deduction of eligible expenses listed in section 1106(b) of the CARES Act (i.e., payroll costs, covered mortgage interest, rent and utilities), concluding that such amounts cannot be deducted if the taxpayer reasonably expects forgiveness of a PPP loan on the basis of such expenses. To read more click here
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