Taxpayers Can Now Deduct Expenses Paid With 2020 PPP Loans on 2021 Tax Returns

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New Guidance From IRS Regarding Original PPP Loans

The IRS recently announced a safe harbor for businesses that received their first-round Paycheck Protection Program (PPP) loans but did not deduct any of their original eligible expenses due to guidance issued before the Consolidated Appropriations Act (CAA).

Before the CAA, the IRS stated that if you received a PPP loan, you could not deduct expenses that are normally considered deductible. Since many taxpayers relied on guidance from the IRS, they didn’t deduct expenses paid with PPP loans on their 2020 tax returns. Later, Congress clarified in the CAA that deductions are allowed for expenses paid for by PPP loans that would otherwise be deductible. This new safe harbor will allow you to deduct expenses on your 2021 tax return instead of filing amended returns or administrative adjustment requests if you filed your tax year on or before December 27, 2020.

Requirements

You are covered by this safe harbor if you satisfy the following requirements:

  • Received an original PPP covered loan
  • Paid or incurred original eligible expenses during your 2020 tax year
  • Timely filed a federal income tax return or information return for your 2020 tax year on or before December 27, 2020
  • On the original federal income tax return, didn’t deduct your original eligible expenses because
    • The expenses resulted in forgiveness of the original PPP loan
    • You reasonably expected at the end of the 2020 tax year that expenses would result in forgiveness

Exclusions to the Rule

PPP second-draw loans enacted under the CAA are not eligible for this safe harbor, as well as the expanded list of expenses in the CAA for which you received a PPP covered loan. These new expenses were not included as part of the original eligible expenses, so they are not eligible to be deducted through an election by a covered taxpayer to apply for the safe harbor.

How to Apply for the Safe Harbor

To apply for the safe harbor, you must attach the statement described below to your federal income tax return or information return for the covered taxpayer’s first year following the 2020 tax year. This statement must be titled “Revenue Procedure 2021-20 Statement” and include the information below:

  • Your name, address, and Social Security or taxpayer identification number
  • Statement that you are applying for the safe harbor
  • The amount and date of the disbursement of the original PPP loan
  • A list of the original eligible expenses paid during the 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.

To discuss how you can take advantage of this safe harbor, contact your Adams Brown advisor today.