PPP loan tax deductions for 2020
By Roman Basi I.If you’re a business owner who received PPP funds but didn’t use them on your tax return, there are things to know. The IRS published a “ safe harbor ” for certain companies that received first-draw Paycheck Protection Program (PPP) loans but did not deduct any of the original qualified expenses because they relied on guidelines issued prior to the implementation of the Consolidated Appropriations Act , 2021 (CAA), in December 2020.
In Notice 2020-32 and Rev. Rul. 2020-27 – which were superseded by Rev. Rul. 2021-2 – The IRS stated that a taxpayer who received a loan through the PPP should not deduct expenses insofar as payment of those costs resulted in forgiveness of a PPP loan. If you paid the typically deductible expenses with PPP loans, you essentially couldn’t claim a deduction on your tax return.
Congress later clarified and overruled the IRS in the CAA, stating that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPS loan that has been forgiven, and that the tax base and other characteristics of the assets the borrower’s will not be reduced forgiveness of the loan. The new safe haven in Rev. Proc. With 2021-20, taxpayers who filed a tax return for tax year 2020 on or before December 27, 2020 will be able to deduct these expenses on their 2021 tax returns instead of filing amended returns or administrative adjustment requests.
Under the safe harbor, a taxpayer may choose to deduct otherwise deductible original eligible expenses if the taxpayer meets the following criteria: 1) The taxpayer must be a “covered” taxpayer; and 2) the taxpayer must comply with all requirements for when and how to choose to apply the Safe Harbor.
A secured taxpayer must meet all of the following conditions: 1) The taxpayer has received an original PPP secured loan; 2) The taxpayer has paid or incurred the original eligible expenses during the taxpayer’s 2020 tax year; 3) On or before December 27, 2020, taxpayer time filed a federal income tax return or information return for the tax year 2020; and 4) On the federal income tax return or the taxpayer’s information return, the taxpayer did not deduct the original eligible expenses because: a) the expenses resulted in forgiveness of the original PPP-secured loan; or (b) at the end of the 2020 tax year, the taxpayer reasonably expected that the expense would result in that remission.
To make a valid choice to apply the Safe Harbor, a Covered Taxpayer must attach to the Covered Taxpayer the statement described below that is filed in a timely manner, including renewals, federal income tax return, or information return for the Covered Taxpayer’s first tax year subsequent to the Covered Taxpayer 2020 tax year in which the original eligible expenses were paid or incurred.
The statement must be entitled “Revenue Procedure 2021-20 Statement” (and named RevProc2021-20.pdf for e-file attachments) and include: 1) The taxpayer’s name, address and Social Security Number or ID number from the taxpayer; 2) A statement that the Covered Taxpayer applies the Safe Harbor in Rev. Proc. 2021-20; 3) The amount and date of disbursement of the original PPP-secured loan from the taxpayer; and 4) a list, including descriptions and amounts, of the original eligible expenses paid or incurred by the Covered Taxpayer during the taxpayer’s 2020 Covered Tax Year that appear on the federal income tax return or the taxpayer’s information return. first tax year following the 2020 tax year.
Roman Basi is a lawyer and CPA at the firm of Basi, Basi & Associates at the Center for Financial, Legal & Tax Planning. He co-wrote the article with Deputy Attorney Michael Hampleman.