Safe harbor for deducting PPP loan expenses

Congress clarified that business expenses resulting in loan forgiveness are deductible, but some taxpayers had followed earlier, contrary IRS guidance.
By Sally P. Schreiber, J.D.

Certain businesses that received a first-draw Paycheck Protection Program (PPP) loan and did not deduct on their 2020 tax return expenses that resulted (or were expected at the end of the 2020 tax year to result) in the loan's forgiveness may deduct the expenses on their 2021 tax return under a safe harbor.

In Notice 2020-32 and Rev. Rul. 2020-27 (which were obsoleted by Rev. Rul. 2021-2) the IRS initially provided that PPP loan recipients could not deduct expenses that are normally deductible under the Code to the extent the payment of those expenses resulted in PPP loan forgiveness. In reliance on that guidance, many taxpayers did not deduct expenses paid with PPP loan proceeds on their 2020 tax returns. Congress clarified in the Consolidated Appropriations Act, 2021 (CAA), P.L. 116-260, in late December 2020 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 are not reduced as a result of the loan forgiveness.

The 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 if they are a "covered taxpayer" as defined in the revenue procedure and satisfy all of the requirements for the time and manner of making the election to apply the safe harbor.

Rev. Proc. 2021-20 does not apply to expenses in an expanded list in Section 304(b)(2) of Division N, Title III, of the CAA, for which an individual or entity that received an original PPP covered loan could receive forgiveness. In addition, the safe harbor does not apply to PPP second-draw loans enacted under the CAA.

To make a valid election to apply the safe harbor, a covered taxpayer must attach a statement described in the revenue procedure 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 taxpayer's 2020 tax year in which the original eligible expenses were paid or incurred. Required information on the statement includes the amount and date of disbursement of the covered taxpayer's original PPP covered loan and a list, including descriptions and amounts, of the original eligible expenses paid or incurred by the taxpayer during the 2020 tax year that are reported on the federal income tax return or information return for the immediately following tax year.

  • Rev. Proc. 2021-20

— By Sally P. Schreiber, J.D., a JofAsenior editor.

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