Client Alert


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Alfred F. DeLeo

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Erik C. Loomis

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Laura L. Cable

Tax Planning

IRS Reverses Position on Deductibility of Expenditures
Paid Out of PPP Loan Proceeds

January 8, 2021

On January 6, 2021, the Internal Revenue Service released Revenue Ruling 2021-2 and reversed its position regarding the deductibility of expenditures that are paid from proceeds of a loan that was obtained under the Paycheck Protection Program (“PPP”).  The PPP was established by the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), enacted on March 27, 2020.

Prior to the issuance of this Revenue Ruling, the Internal Revenue Service had issued guidance stating that no income tax deduction would be allowed for an expenditure to the extent the expenditure resulted in forgiveness of a PPP loan because forgiveness of all or a portion of a PPP loan does not result in income to the borrowing taxpayer.  According to the Internal Revenue Service, allowing a PPP loan recipient to deduct expenses paid with PPP loan proceeds and also not be taxable on the forgiveness of the loan would result in a double tax benefit.  We discussed the Internal Revenue Service’s prior position, as well as related prior guidance, in our client alert of November 24, 2020. 

In Revenue Ruling 2021-2, the Internal Revenue Service declared its prior guidance, Notice 2020-32 and Revenue Ruling 2020-27, are obsolete.  This change was made in response to the passage of the Consolidated Appropriations Act, enacted on December 27, 2020.  The Consolidated Appropriations Act, among other things, provides that that no income tax deduction will be denied, no tax attribute will be reduced, and no basis increase will be denied because forgiven PPP loan proceeds are excluded from gross income.  It is not yet clear whether the Internal Revenue Service will issue any additional guidance on this topic. 

We will keep you updated as we learn more about the treatment of PPP loans, but please do not hesitate to contact us directly if you have any questions or would like to discuss the treatment of these loans in more detail. 

City Documentary Transfer Tax Rate Increases

In California, cities and counties may impose a documentary transfer tax upon any deed, instrument, or writing by which any lands, tenements or other realty sold within the county or city are granted, assigned, transferred or otherwise conveyed.  Under California law, charter cities and the City and County of San Francisco are permitted to enact transfer tax ordinances that vary from the general provisions of the State Documentary Transfer Tax Act, which provides for a basic statutory rate of $1.10 per $1,000 of consideration or value of the interest or property conveyed.  In the recent November election, the following jurisdictions voted to increase their city documentary transfer tax rate:  

  • San Francisco voters approved Proposition I, which increases the existing real estate documentary transfer tax rate for transfers of property with a consideration or value of at least $10 million and less than $25 million from 2.75% to 5.5%.  For transfers of property with a consideration or value of $25 million or more, the rate is increased from 3% to 6%.  The increase became effective on January 1, 2021.
  • Albany voters approved Measure CC, which increases the city’s documentary transfer tax to from $11.50 to $15.00 per $1,000 of the value of consideration.  The increase became effective on January 1, 2021.
  • San Leandro voters approved Measure VV, which increases the city’s documentary transfer tax from $6.00 to $11.00 per $1,000 of the value of the consideration.  The increase became effective on January 1, 2021.
  • Culver City voters approved Measure RE, which establishes a marginal tax rate for the city’s documentary transfer tax, based on sales price or value. The new rates are as follows:
    • 0.45% on amounts of $1,499,999 or less. (Same as current rate)
    • 1.5% on amounts from $1,500,000 to $2,999,999.
    • 3.0% on amounts from $3,000,000 to $9,999,999.
    • 4.0% on amounts $10,000,000 and above.

The increase will become effective on April 1, 2021.

  • Santa Monica voters approved Measure SM, which increases the city’s documentary transfer tax on transfers of property where the consideration or the value of the interest or property conveyed is $5 million or more from $3.00 to $6.00 per $1,000.  The increase will become effective on March 1, 2021. 

If you have any questions regarding these increases or would like to learn more about county or city documentary transfer taxes, please do not hesitate to contact us directly. 

Cox Castle has created a Task Force to monitor, analyze and advise on a wide array of business and legal challenges arising from the COVID-19 pandemic, including the matters discussed in this alert.  Coordinating across multiple practice groups and industries, the Task Force is keeping track of the latest developments with COVID-19 and working to provide the best advice possible to our clients in the real estate industry and beyond.  If you have any questions about these matters or responding to the COVID-19 pandemic more generally, please reach out to any Cox Castle professional or member of the Task Force.

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