By Roman Basi If you are a business owner who received PPP funds but did not utilize them on your tax return, there are things you need to know. The IRS publicized a “safe harbor” for certain companies that received first-draw Paycheck Protection Program (PPP) loans but did not deduct any of the original qualified expenses because they relied on direction issued before the execution of the Consolidated Appropriations Act, 2021 (CAA), in December 2020.
In Notice 2020-32 and Rev. Rul. 2020-27—which were made obsolete by Rev. Rul. 2021-2—the IRS stated that a taxpayer who received a loan through the PPP was not permitted to deduct expenses to the extent the payment of those expenses resulted in PPP loan forgiveness. Essentially, if you paid for usually deductible expenses using PPP loans, you could not claim a deduction on your tax return.
Congress later clarified and overruled the IRS in the CAA, stating that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven, and that the tax basis and other attributes of the borrower’s assets will not be reduced because of the loan forgiveness. The new safe harbor in Rev. Proc. 2021-20 allows taxpayers who filed a tax year 2020 return on or before Dec. 27, 2020, to deduct those expenses on their 2021 tax return rather than file amended returns or administrative adjustment requests.
Under the safe harbor, a taxpayer may elect to deduct otherwise deductible original eligible expenses if the taxpayer meets the following criteria: 1) The taxpayer must be a “covered” taxpayer; and 2) the taxpayer must satisfy all requirements for the time and manner of making the election to apply the safe harbor.
A covered taxpayer must satisfy all of the following requirements: 1) The taxpayer received an original PPP covered loan; 2) The taxpayer paid or incurred original eligible expenses during the taxpayer’s 2020 tax year; 3) On or before December 27, 2020, the taxpayer time filed a federal income tax return or information return for the 2020 tax year; and 4) On the taxpayer’s federal income tax return or information return, the taxpayer did not deduct the original eligible expenses because: a) the expenses resulted in forgiveness of the original PPP covered loan; or b) the taxpayer reasonably expected at the end of the 2020 tax year that the expenses would result in that forgiveness.
To make a valid election to apply the safe harbor, a covered taxpayer must attach the statement described below to the covered taxpayer’s timely filed, including extensions, federal income tax return or information return for the covered taxpayer’s first tax year following the covered taxpayer’s 2020 tax year in which the original eligible expenses were paid or incurred.
The statement must be titled “Revenue Procedure 2021-20 Statement” (and named RevProc2021-20.pdf for e-file attachments) and include the following: 1) The covered taxpayer’s name, address and Social Security number or taxpayer ID number; 2) A statement that the covered taxpayer is applying the safe harbor in Rev. Proc. 2021-20; 3) The amount and date of disbursement of the taxpayer’s original PPP covered loan; and 4) A list, including descriptions and amounts, of the original eligible expenses paid or incurred by the covered taxpayer during the covered taxpayer’s 2020 tax year that are reported on the federal income tax return or information return for the first tax year following the 2020 tax year.
Roman Basi is an attorney and CPA with the firm Basi, Basi & Associates at the Center for Financial, Legal & Tax Planning. He co-authored the article with Michael Hampleman, associate attorney.