IRS Issues Safe Harbor for Expense Deductions in Connection with PPP Loans

On Thursday, April 22, 2021 the IRS issued Rev. Proc. 2021-20, which provides a safe harbor for taxpayers that received first round PPP loans in 2020 but did not deduct any of the original expenses due to prior IRS guidance.

As background, after the CARES Act authorized the Paycheck Protection Program, the IRS issued guidance (Notice 2020-32 and Rev. Rule 2020-27, now made obsolete by Rev. Proc. 2021-20) which said that PPP loan recipients were not able to deduct expenses that would otherwise be deductible if the expenses were paid using proceeds from a PPP loan that was anticipated to be forgiven.

However, the Consolidated Appropriations Act (CAA) signed into law on December 27, 2020 reversed this decision by clarifying that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven, and that the tax basis will not be reduced as a result of the loan forgiveness.

The new IRS safe harbor allows taxpayers that filed a tax return for 2020 on or before December 27, 2020 to deduct those expenses on their 2021 tax return rather than file an amended return or administrative adjustment request. In order to do this, the taxpayer must satisfy all of the following:

  • The taxpayer received an original PPP covered loan,
  • The taxpayer paid or incurred eligible expenses during the 2020 tax year,
  • The taxpayer timely filed (including extensions) a federal income tax return or information return for the 2020 tax year on or before December 27, 2020, and
  • The taxpayer did not deduct eligible expenses on the federal income tax return either because the expenses resulted in forgiveness of the PPP loan or the taxpayer reasonably expected that the expenses would result in forgiveness.

The safe harbor election can be made by attaching a statement with the required information to the federal income tax return. This statement is titled “Revenue Procedure 2021-20 Statement” and must include specified information, including a list of eligible expenses along with descriptions and amounts.

The safe harbor notes that the IRS is still able to examine the claimed deductions for eligible expenses and request additional information to verify the amounts. It also states that the safe harbor does not apply to PPP second-draw loans enacted under the CAA. The revenue procedure is effective for any tax year ending in calendar year 2020 and for the immediately subsequent tax year.

If you have any questions about this matter, please contact your Kreischer Miller relationship professional or any member of our Tax Strategies team. For additional news and resources, visit our COVID-19 Resource Center here.

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