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IRS Declares Paycheck Protection Program Guidance Obsolete

Dated Jan. 7, 2021

Citations: Rev. Rul. 2021-2; 2021-4 IRB 495

SUMMARY BY TAX ANALYSTS

The IRS has declared obsolete (Rev. Rul. 2021-2) prior guidance (Notice 2020-32, Rev. Rul. 2020-27) that prevented some taxpayers from deducting otherwise deductible expenses to the extent that the payment of those expenses results (or is expected to result) in the forgiveness of a loan guaranteed under the Paycheck Protection Program.

The Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) provides for the forgiveness of covered loans and that any amount that otherwise would be includable in an eligible recipient’s gross income by reason of that forgiveness is excluded from gross income. The CARES Act also provides that no deduction shall be denied; no tax attribute shall be reduced; and no basis increase shall be denied because of the exclusion from gross income.

The IRS concluded in Notice 2020-32 that the direct link between (1) the amount of tax-exempt covered loan forgiveness that a recipient receives under the CARES Act and (2) an equivalent amount of the otherwise deductible payments made by a recipient for eligible expenses constitutes a sufficient connection for section 265(a) to apply to disallow deductions for those payments to the extent of the income excluded. Similarly, Rev. Rul. 2020-27 confirmed that PPP loan participants that paid or incurred deductible expenses may not deduct those expenses that year if the taxpayer can reasonably expect to receive loan forgiveness.

However, as a result of the amendment made by the enactment of the COVID-related Tax Relief Act of 2020 regarding the federal income tax consequences of covered loan forgiveness, the IRS has acknowledged that the conclusion reached in Notice 2020-32 and the holding in Rev. Rul. 2020-27 are no longer accurate statements of the law. Accordingly, the prior guidance is declared obsolete as of December 27, 2020, the effective date of the Tax Relief Act.

Obsoletes Notice 2020-32 and Rev. Rul. 2020-27

This ruling obsoletes Notice 2020-32, 2020-21 I.R.B. 837 (May 18, 2020), and Rev. Rul. 2020-27, 2020-50 I.R.B. 1552 (Dec. 7, 2020), due to the enactment of § 276(a) of the COVID-related Tax Relief Act of 2020 (Act), enacted as Subtitle B of Title II of Division N of the Consolidated Appropriations Act, 2021, Public Law 116-260, 134 Stat.1182 (Dec. 27, 2020).

Notice 2020-32 and Rev. Rul. 2020-27 provide that certain taxpayers (eligible recipients) may not deduct certain otherwise deductible expenses to the extent that the payment of such expenses results (or is expected to result) in the forgiveness of a loan (covered loan) guaranteed under the Paycheck Protection Program authorized under § 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)) (SBA), as enacted by § 1102 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-93 (Mar. 27, 2020). Section 1106(b) of the CARES Act provides for the forgiveness of covered loans and § 1106(i) of the CARES Act provides, for purposes of the Internal Revenue Code, that any amount that otherwise would be includible in an eligible recipient's gross income by reason of such forgiveness is excluded from gross income.

Section 1106(i) of the CARES Act was redesignated, and transferred to § 7A(i) of the SBA, and amended by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, which was enacted as Title III of Division N of the Consolidated Appropriations Act, 2021. Section 276(a) of the Act amended § 7A(i) of the SBA to provide that no amount shall be included in the gross income of the eligible recipient by reason of forgiveness of indebtedness described in § 7A(b) of the SBA. See § 7A(i)(1) of the SBA. In addition, § 276(a) provides that no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided by § 7A(i)(1) of the SBA. See § 7A(i)(2) of the SBA. The amendment made by § 276(a) of the Act applies to taxable years ending after March 27, 2020, the date of the enactment of the CARES Act. See § 276(a)(2) of the Act.

As a result of the amendment made by § 276(a) of the Act regarding the Federal income tax consequences of covered loan forgiveness, the conclusion stated in Notice 2020-32, and the holding stated in Rev. Rul. 2020-27, are no longer accurate statements of the law. Accordingly, Notice 2020-32 and Rev. Rul. 2020-27 are declared obsolete as of the effective date of the amendment made by § 276(a) of the Act.

DRAFTING INFORMATION

The principal authors of this revenue ruling are Charles Gorham, Charles Magee and Bruce Chang, Office of the Associate Chief Counsel (Income Tax & Accounting). For further information regarding this revenue ruling, please contact Mr. Chang at (202) 317-4870 or Patrick Clinton at (202) 317-4651 (not toll-free numbers).

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