On November 18, the IRS circulated income Procedure 2020-51, which supplies a safe harbor guideline on whenever a taxpayer can Read More Here subtract costs 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 the taxpayer elects never to apply for loan forgiveness. Underneath the safe harbor, in the event that taxpayer follows the reporting requirements in part 4 regarding the income procedure, they could deduct otherwise allowable expenses as much as the quantity of PPP principal which is why loan forgiveness ended up being denied or otherwise not looked for.

Then in most cases, under Revenue Ruling 2020-27, the expenses will not be deductible in the year incurred if the safe harbor does not apply.

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

The taxpayer’s timely filed initial return, including extensions, for the taxation 12 months when the expenses had been compensated or incurred

An amended return (or, when it comes to specific partnerships, an Administrative modification demand) for that taxation 12 months

The taxpayer’s timely filed initial return, including extensions, when it comes to subsequent year.The revenue procedure doesn’t especially enable or specifically forbid the deduction for the subsequent 12 months to be studied for an amended return (or AAR) for the 12 months.

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

Let’s have a look at two examples:

Instance one

The taxpayer filed their loan forgiveness application in 2020, asking for a full loan forgiveness of $200,000. The taxpayer possessed an expectation that is reasonable of loan forgiveness. Relative to IRS income Ruling 2020-27, the taxpayer filed their calendar year 2020 earnings income tax return without using deductions for otherwise qualified business costs in the total amount of $200,000.

In 2021, they get notice from their loan provider 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 to their 2021 income income tax return.

Example two

The taxpayer incurred $400,000 of qualified PPP expenses in 2020. At 12 months end, that they had maybe perhaps maybe maybe not filed their loan forgiveness application but likely to achieve this in 2021 plus they possessed an expectation that is reasonable of 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 quantity of $400,000.

In 2021, the taxpayer changed their head and do not apply for loan forgiveness also to keep consitently the PPP funds as that loan. 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 income tax return.

Reporting needs

Even though the need of this income procedure is debateable, given that taxpayer would already qualify to deduct qualified business expenses, a number of reporting requirements in part 4 for the income procedure that may be a trap for the unwary whom file or amend 2020 or 2021 earnings tax statements without following these reporting guidelines.

Area 4 of this income procedure calls for that the taxpayer attach a declaration towards the return upon that your taxpayer deducts the eligible that is“non-deducted.” The declaration must certanly be en en titled “Revenue Procedure 2020-51 Statement” and must consist of all seven associated with the after:

The taxpayer’s name, target and social protection quantity or company recognition quantity

A declaration indicating whether or not the taxpayer can be a taxpayer that is eligible either area 3.01 or part 3.02 of income Procedure 2020-51

A declaration that the taxpayer is using part 4.01 or part 4.02 of income Procedure 2020-51

The date and amount of disbursement for the taxpayer’s covered loan

The amount that is total of loan forgiveness that the taxpayer had been rejected or made a decision to not any longer seek

The date the taxpayer had been rejected or chose to no longer seek covered loan forgiveness

The amount of eligible costs and non-deducted eligible costs being reported in the return

When you yourself have any queries about income Procedure 2020-51, income Ruling 2020-27 or your particular situation in regards to PPP loan forgiveness, contact Wipfli.