IRS Denies PPP Tax Deductions Even When Loan Could Be Forgiven In The Future. Tax loans

IRS Denies PPP Tax Deductions Even When Loan Could Be Forgiven In The Future. Tax loans

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 will likely to be permitted on any of the after:

  • The taxpayer’s timely filed initial return, including extensions, when it comes to income tax 12 months where the expenses had been paid or incurred
  • An amended return (or, when it comes to particular partnerships, an Administrative modification demand) for the income tax year
  • The taxpayer’s timely filed initial return, including extensions, for the subsequent year.The revenue procedure doesn’t especially enable or specifically forbid the deduction when it comes to subsequent 12 months to be studied on an amended return (or AAR) for the 12 months.
  • The revenue procedure particularly covers the “2020 taxable year” while the “subsequent year.” It’s reasonable to assume that the “2020 taxation year” is read to suggest the income tax year where the PPP eligible expenses had been compensated or incurred.

    Let’s take a good 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 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 quantity of $200,000.

    In 2021, they receive notice from their loan provider that just $175,000 ended up being forgiven. Under this revenue procedure, the taxpayer gets the choice of amending their 2020 income income tax return (or filing an AAR) to subtract $25,000 of expense 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 not filed their loan forgiveness application but anticipated to do this in 2021 in addition they possessed an expectation that is reasonable of loan forgiveness. With respect, with IRS Revenue Ruling 2020-27, the taxpayer filed their 2020 income taxation return without using deductions for otherwise qualified company costs in the quantity of $400,000.

    In 2021, the taxpayer changed their brain and do not apply for loan forgiveness also to keep carefully the PPP funds as that loan. The taxpayer has the option of amending their 2020 income tax return (or filing an AAR) to deduct $400,000 of expenses or claiming the $400,000 of expenses on their 2021 income tax return under this revenue procedure.

    Reporting needs

    Whilst the need for the income procedure is dubious, whilst the taxpayer would currently qualify to deduct business that is qualified, a number of reporting requirements in part 4 of this revenue procedure that may be a trap when it comes to unwary whom file or amend 2020 or 2021 earnings tax statements without following these reporting guidelines.

    Area 4 regarding the revenue procedure calls for that the taxpayer attach a declaration to your return on that your taxpayer deducts the eligible that is“non-deducted.” The statement needs to be en titled “Revenue Procedure 2020-51 Statement” and must consist of all seven associated with after:

  • The taxpayer’s name, target and security that is social or boss recognition quantity
  • A declaration indicating whether or not the taxpayer can be a taxpayer that is eligible either part 3.01 or part 3.02 of Revenue Procedure 2020-51
  • A declaration that the taxpayer is applying part 4.01 or area 4.02 of Revenue Procedure 2020-51
  • The date and amount of disbursement associated with the taxpayer’s covered loan
  • The total number of covered loan forgiveness that the taxpayer had been rejected or chose continue reading this to not any longer seek
  • The date the taxpayer had been rejected or made a decision to no longer seek covered loan forgiveness
  • The quantity of eligible costs and non-deducted eligible costs being reported in the return
  • When you have any queries about income Procedure 2020-51, income Ruling 2020-27 or your particular situation in regards to PPP loan forgiveness, contact Wipfli.