Taxpayers who have already filed their 2020 federal returns may be able to deduct Paycheck Protection Program (PPP) loan expenses in 2021. Revenue Procedure 2021-20 establishes a safe harbor under which certain taxpayers may claim certain expenses paid or incurred in 2020 and used to support forgiveness of an original PPP loan as deductions on their 2021 federal tax returns. They will not need to file an amended return for 2020 to claim the deductions.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted on March 27, 2020, established the PPP, which provides forgivable emergency loans to businesses under Section 7(a) of the Small Business Act (SBA). The CARES Act excludes the forgiven loan amount from taxable income, but does not address whether borrowers can deduct expenses used to support PPP loan forgiveness.
On April 30, 2020, the IRS issued Notice 2020-32 which held that PPP loan recipients could not deduct expenses that were used to support forgiveness of an original PPP loan. The IRS subsequently issued Revenue Ruling 2020-27 on November 18, 2020, which further held that a taxpayer whose PPP loan had not been forgiven in 2020 also could not deduct expenses paid or incurred in 2020 if the taxpayer had a reasonable expectation that the expenses would be reimbursed in the form of PPP loan forgiveness.
Section 276 of the COVID-related Tax Relief Act of 2020, which was enacted on December 27, 2020, reverses Notice 2020-32 and Revenue Ruling 2020-27 and permits a deduction for otherwise deductible expenses used to support forgiveness of a PPP loan. As a result, the IRS issued Revenue Ruling 2021-2, which rescinds Notice 2020-32 and Revenue Ruling 2020-27.
Revenue Procedure 2021-20 allows a “Covered Taxpayer” to deduct on a 2021 tax return otherwise deductible expenses paid or incurred in 2020 that were used to support PPP loan forgiveness. Expenses eligible for this treatment are those paid or incurred in tax years ending after March 26, 2020, and on or before December 31, 2020.
A “Covered Taxpayer” is a taxpayer that:
- Received an original PPP loan;
- Paid or incurred eligible expenses during 2020;
- Timely filed, on or before December 27, 2020, a Federal tax return for 2020; and
- Did not deduct the eligible expenses on the 2020 tax return because the expenses resulted in forgiveness of the original PPP loan, or it was reasonably expected at the end of 2020 that the expenses would result in such forgiveness.
The safe harbor applies only to “original eligible expenses” (i.e., payroll costs, interest on a covered mortgage, rent on a covered lease, and covered utility payments), and does not apply to expenses described in the expanded list of eligible expenses under Section 304(b)(2) of the Economic Aid Act, which was passed as part of the Consolidated Appropriations Act of 2021. The safe harbor also does not apply to PPP “Second Draw Loans.”
Making the Election
To make the safe harbor election, a Covered Taxpayer must attach a statement of election to the taxpayer’s timely filed Federal income tax return or information return for 2021. The statement must be titled “Revenue Procedure 2021-20 Statement” (and named RevProc2021-20.pdf for e-file attachments) and include:
- The taxpayer’s name, address, and social security number or taxpayer identification number;
- A statement that the taxpayer is applying the safe harbor provided by Revenue Procedure 2021-20;
- The amount and date of disbursement of the taxpayer’s original PPP loan; and
- A list, including descriptions and amounts, of the original eligible expenses paid or incurred by the taxpayer during 2020 that are reported on the 2021 Federal tax return.
The safe harbor does not preclude the IRS from examining any issues related to the claimed deduction for the original eligible expenses, including determining whether a taxpayer is eligible for the safe harbor, the amount of the deduction, and whether the taxpayer has substantiated the claimed deduction. The safe harbor also does not preclude the IRS from requesting additional information or documentation verifying any amounts described in the election statement.
Revenue Procedure 2021-20 also obsoletes Revenue Procedure 2020-51, which established safe harbor procedures that an eligible taxpayer could follow to claim a deduction for expenses used to support PPP loan forgiveness when the taxpayer later finds that some or all of a PPP loan will not be forgiven.
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