Eligible taxpayers can officially deduct original Paycheck Protection Program loan expenses under an IRS revenue procedure providing a safe harbor to claim the expenses on the subsequent year’s tax return.
In Rev. Proc. 2021-20, 2021-19 IRB 1, issued April 22, the IRS makes clear that under the Consolidated Appropriations Act, 2021 (P.L. 116-260), businesses that received first-round PPP loans can deduct original eligible expenses associated with those loans. Previous IRS guidance disallowed deductions for those expenses.
The new safe harbor relief doesn’t address expenses for second-draw PPP loans. However, Rev. Proc. 2021-20 paves the way for “covered taxpayers” — some of whom were hit hard by the COVID-19 pandemic — to fully deduct original PPP loan expenses on timely filed federal income tax returns.
That could include deductions for payroll costs, mortgage interest, and covered rent and utility payments, which would be claimed in the taxpayer’s immediately subsequent taxable year, according to the IRS.
Old Guidance Obsolete
Before the Consolidated Appropriations Act, existing IRS guidance prevented taxpayers from claiming deductions for expenses tied to original PPP loan forgiveness.
Rev. Rul. 2020-27, 2020-50 IRB 1552, issued in November 2020, said that taxpayers who reasonably expected to be reimbursed for expenses through loan forgiveness by the end of the 2020 taxable year couldn’t deduct PPP loan expenses. That was true even though the Coronavirus Aid, Relief, and Economic Security Act excluded PPP loan forgiveness from gross income.
However, in accordance with the Consolidated Appropriations Act, the new revenue procedure renders Rev. Rul. 2020-27 obsolete, along with related Notice 2020-32, 2020-21 IRB 837, which disallowed a deduction for expenses that result in loan forgiveness.
Rev. Proc. 2021-20 helps to repair the apparent disconnect between the CARES Act’s exclusion of PPP loans from gross income and its lack of guidance regarding expenses, which businesses used PPP loans to pay, that would otherwise be deductible.
Under Rev. Proc. 2021-20, businesses deemed “covered taxpayers” can use the PPP loan expense safe harbor. Those are taxpayers who received an original PPP covered loan, paid or incurred original eligible expenses during the 2020 taxable year, timely filed a federal income tax return for 2020, and didn’t deduct the original expense because of forgiveness or expected forgiveness of the loan.
The safe harbor doesn’t apply to expenses that were expanded under the Consolidated Appropriations Act because those expenses aren’t considered by the IRS to be “original eligible expenses.” As a result, businesses cannot claim specific operations and worker protection expenses or specific property damages and supplier costs that were detailed in that law.
Second-draw PPP loans aren’t considered by the IRS to be “original PPP covered loans,” and so aren’t addressed in the latest revenue procedure.
In any case, eligible businesses that want to take advantage of the safe harbor in Rev. Proc. 2021-20 should make their elections as attachments to their timely filed returns, according to the IRS. Those elections would be “for the first taxable year following the 2020 taxable year in which the original expenses were incurred or paid.”