Treasury/IRS Provide Safe Harbor for Deducting Original PPP Loan Expenses

The Treasury and IRS have provided a safe harbor for certain taxpayers that received a loan pursuant to the Paycheck Protection Program (PPP) and, based on guidance issued before the enactment of the Consolidated Appropriations Act, 2021 (the “Act”), did not deduct certain otherwise deductible expenses paid or incurred during the taxable year(s) ending after March 26, 2020 and on or before December 31, 2020 (“2020 taxable year”) that resulted in, or were expected to result in, forgiveness of the loan.

Under the safe harbor, such taxpayers may elect to deduct these expenses on the taxpayer’s timely filed original federal income tax return or information return, as applicable, for the taxpayer’s first taxable year following the taxpayer’s 2020 taxable year rather than filing an amended return or administrative adjustment request for the taxpayer’s 2020 taxable year. 

In order to be eligible for the safe harbor, the taxpayer must satisfy, in part:

• The taxpayer received an original PPP loan (Second Draw PPP loans are not covered by the safe harbor);
• The taxpayer paid or incurred original eligible expenses during the taxpayer’s 2020 taxable year;
• On the taxpayer’s federal income tax return or information return, as applicable, the taxpayer did not deduct the original eligible expenses because—
  • The expenses resulted in forgiveness of the original PPP covered loan, or
  • The taxpayer reasonably expected at the end of the 2020 taxable year that the expenses would result in such forgiveness.

As part of the Act, the list of expenses for which an individual or entity that received an original PPP loan could receive forgiveness was expanded.  Those new expenses are not eligible to be deducted under this safe harbor election.

To make a valid safe harbor election, a covered taxpayer must do the following:

• The election is made by attaching a statement to the taxpayer’s timely filed (including extensions) federal income tax return or information return, as applicable, for the taxpayer’s first taxable year following the 2020 taxable year in which the original eligible expenses were paid or incurred; and
• The statement must be titled “Revenue Procedure 2021-20 Statement” and include-
  • Taxpayer’s name, address and social security number or taxpayer identification number;
  • A statement that the taxpayer is applying the safe harbor provided by this revenue procedure;
  • The amount and date of disbursement of the taxpayer’s original PPP loan; and
  • A list, including descriptions and amounts, of the original eligible expenses paid or incurred by the taxpayer during the 2020 taxable year that are reported on the federal income tax return or information return, as applicable, for the taxpayer’s first taxable year following the 2020 taxable year.

Notwithstanding the application of the safe harbor, the revenue procedure explicitly notes that the IRS is not precluded from examining any issues relating to the claimed deductions for original eligible expenses, including whether the taxpayer is entitled to apply the safe harbor under this revenue procedure, the amount of the deduction and whether the deduction claimed has been substantiated.  Also, the IRS may request additional information or documentation verifying any amounts described in the required statement.