If you filed your 2020 tax return prior to December 27, 2020 when the Consolidated Appropriations Act of 2021 (the “CAA”) was enacted and therefore did not deduct certain expenses due to your Paycheck Protection Program (“PPP”) loan, good news has arrived from the IRS! On April 22, 2021 the IRS released Revenue Procedure 2021-20, which provides certain taxpayers that received a first draw PPP loan with a safe harbor to claim a deduction for what would have otherwise been deductible expenses paid or incurred during the taxpayer’s 2020 tax year but, based on IRS guidance at the time the taxpayer’s return was filed, were not deductible.
This safe harbor is available to certain taxpayers that (1) received a first draw PPP loan, (2) filed their 2020 tax return prior to December 27, 2020, and (3) will file a tax return for the subsequent tax year. Most likely, this group of taxpayers will include those whose 2020 tax year ended on or before September 30, 2020. This group will not include those whose final tax return was filed before December 27, 2020.
Expenses Paid or Incurred in 2020 with First Draw PPP Loan Proceeds:
A taxpayer that received a first draw PPP loan is eligible for forgiveness of the PPP loan up to an amount equal to payments made with PPP loan proceeds for (1) payroll costs, (2) interest on a secured debt obligation, (3) any rent or lease payments, and (4) any utility payments (collectively, “Eligible Expenses”), subject to certain reductions related to reduced headcount or reduced compensation.
Prior to the enactment of the CAA, guidance issued by the Department of the Treasury and the Internal Revenue Service, including Notice 2020-32 and Notice 2020-27, prohibited taxpayers that received a PPP loan from deducting certain otherwise deductible Eligible Expenses incurred during the tax year ending after March 26, 2020, and on or before December 31, 2020 (the “2020 tax year”) that were expected to result in forgiveness of the PPP loan.
The CAA retroactively provided new rules allowing taxpayers to deduct PPP Eligible Expenses. (Please see our December 22, 2020 advisory for more information on the CAA). Specifically, no amount shall be included in gross income of an eligible taxpayer by reason of forgiveness of a PPP loan and no deduction shall be denied by reason of that exclusion from gross income.
Steps to Take to Meet the Deduction Safe Harbor:
In Revenue Procedure 2021-20, the IRS provides guidance on how to claim such deductions for expenses paid or incurred during the taxpayer’s 2020 tax year. If the taxpayer meets the following safe harbor eligibility requirements (i.e., the taxpayer is a covered taxpayer and properly makes the safe harbor election) it may elect to deduct such Eligible Expenses on its timely filed (including extensions) original federal income tax return for the tax year ending in 2021 rather than filing an amended return or making an administrative adjustment request for the taxpayer’s 2020 taxable year in which the expenses were paid or incurred.
To be a “covered taxpayer,” the taxpayer must have:
- received a first draw PPP loan,
- paid or incurred Eligible Expenses during its 2020 tax year, and
- timely filed (including extensions) a federal income tax return or information return, as applicable, for its 2020 year on or before December 27, 2020, and on such return did not deduct the Eligible Expenses because
- (i) the Eligible Expenses resulted in forgiveness of the original PPP loan, or
- (ii) the taxpayer reasonably expected the Eligible Expenses would result in such forgiveness.
The covered taxpayer must make the safe harbor election by attaching a statement titled “Revenue Procedure 2021-20 Statement” to its timely filed (including extensions) original federal income tax return for the 2021 tax year, which includes:
- the taxpayer’s name, address, and taxpayer identification number,
- a statement that the taxpayer is applying for the safe harbor provided by Section 3.01 of Revenue Procedure 2021-20,
- the amount and date of disbursement of the taxpayer’s first draw PPP loan, and
- a list of the Eligible Expenses paid or incurred during the taxpayer’s 2020 taxable year.
Revenue Procedure 2021-20 permits certain covered taxpayers to deduct Eligible Expenses paid or incurred in 2020 on their 2021 tax return rather than filing an amended 2020 tax return. This safe harbor is available to taxpayers that received a PPP loan and filed their 2020 tax return prior to the enactment of the CAA. Although including the expenses on the taxpayer’s 2021 tax return is less burdensome than filing an amended 2020 tax return, it will take the taxpayer longer to realize the benefit of the deduction under this procedure than if they file an amended return because they will have to wait until after the close of their 2021 tax year.