IRS Announces Safe Harbor for First-Round PPP Deductions

The early bird gets the worm.

We’re taught that punctuality and working ahead leads to success. While generally holding true, there are obviously some exceptions—like when Congress passes retroactive tax law changes a month after Americans start filing their returns.

Case in point: The Paycheck Protection Program originally did not allow deductions on expenses that were paid for with the proceeds from the loan. That changed when Congress passed the COVID-Related Tax Relief Act of 2020 as part of the Consolidated Appropriations Act that was signed into law on December 27, 2020.

Now, certain expenses paid for with a PPP loan can be deducted, like:

  • Payroll costs
  • Interest on covered mortgage obligations
  • Rent obligation payments
  • Utility payments

Unfortunately, some taxpayers filed using the original guidance, meaning they did not claim deductions for which they are eligible.

Given just how devastating 2020 was for small businesses across the country, saying “every little bit counts” is an understatement. Luckily, the IRS yesterday announced a safe harbor that should help.  

What does the first-round PPP deduction safe harbor do?

Revenue Procedure 2021-20 includes a safe harbor for first-round PPP loan recipients who filed using guidance issued before the passage of the COVID-Related Tax Relief Act. Under the safe harbor, affected small business owners can claim eligible tax year 2020 expenses on their tax year 2021 return.

Here’s how the IRS generally defines a “covered taxpayer” for the purposes of qualifying for the safe harbor:

  1. The taxpayer received an original PPP covered loan;
  2. The taxpayer paid or incurred original eligible expenses during the taxpayer’s 2020 taxable year;
  3. On or before December 27, 2020, the taxpayer timely filed, including extensions, a Federal income tax return or information return, as applicable, for the taxpayer’s 2020 taxable year; and
  4. On the taxpayer’s Federal income tax return or information return, as applicable, the taxpayer did not deduct the original eligible expenses because
    1. The expenses resulted in forgiveness of the original PPP covered loan; or
    2. The taxpayer reasonably expected at the end of the 2020 taxable year that the expenses would result in such forgiveness.

It’s important to note that this guidance does not apply to second-draw PPP loans.

To learn more about the safe harbor rules—including disallowed expenses and other limitations—check out the revenue ruling on IRS.gov.

Source: IR-2021-91; RP-2021-20

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