IRS Provides Safe Harbor for Some PPP Loan Recipients

IRS Provides Safe Harbor for Some PPP Loan Recipients

Internal Revenue Service

The IRS has issued guidance (Rev. Proc. 2021-20) providing a safe harbor for some taxpayers that received a loan through the Paycheck Protection Program and did not deduct otherwise deductible expenses paid or incurred during the tax year ending after March 26, 2020, and on or before December 31, 2020, that resulted in, or were expected to result in, forgiveness of the loan. The Coronavirus Aid, Relief, and Economic Security Act established the PPP to provide economic assistance to small businesses adversely affected by the COVID-19 crisis. Under the PPP as it existed before enactment of the Consolidated Appropriations Act, 2021, the Small Business Administration was permitted to guarantee the full principal amount of a covered loan (original PPP covered loan). An individual or entity that was eligible to receive an original PPP covered loan could receive forgiveness of the full principal amount of the loan up to an amount equal to the following costs incurred and payments made during the original PPP covered period: (1) payroll costs, (2) interest on a covered mortgage obligation, (3) any covered rent obligation payment, and (4) any covered utility payment <a href="/lr/resolve//2cgz7">Notice 2020-32</a>, issued in April 2020, clarified that no deduction was allowed for an otherwise deductible expense if the payment of the expense resulted in forgiveness of an original PPP covered loan. In November 2020 the IRS determined in <a href="/lr/resolve//2d75b">Rev. Rul. 2020-27</a> that a taxpayer incurring otherwise deductible expenses in its 2020 tax year could not deduct those expenses if, at the end of its 2020 tax year, the taxpayer had a reasonable expectation of reimbursement of the expenses in the form of covered loan forgiveness. At the same time, <a href="/lr/resolve//2d75d">Rev. Proc. 2020-51</a> provided a safe harbor to address situations covered by Rev. Rul. 2020-27 in which the taxpayer’s expectation of covered loan forgiveness was not realized in a subsequent tax year. The COVID-related Tax Relief Act of 2020 (part of the Consolidated Appropriations Act, 2021) added new rules regarding the federal income tax consequences of forgiveness of original PPP covered loans, specifically providing that “no amount shall be included in the gross income of the eligible recipient by reason of forgiveness of indebtedness [on an original PPP covered loan and] no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of [that] exclusion from gross income.” As a result, <a href="/lr/resolve//2cgz7">Notice 2020-32</a> and <a href="/lr/resolve//2d75b">Rev. Rul. 2020-27</a> became obsolete and <a href="/lr/resolve//2dd42">Rev. Rul. 2021-2</a> was released to confirm that the prior guidance no longer stated the law accurately. Similarly, the legal premise underlying <a href="/lr/resolve//2d75d">Rev. Proc. 2020-51</a> is no longer correct. Therefore, under the safe harbor in Rev. Proc. 2021-20, eligible taxpayers may elect to deduct otherwise deductible original eligible expenses on the taxpayer’s timely filed original federal income tax return or information return, as applicable, for the taxpayer’s first tax year following the 2020 tax year rather than filing an amended return or administrative adjustment request for the taxpayer’s 2020 tax year. The taxpayer must be a covered taxpayer as defined in the revenue procedure and satisfy all the time and manner requirements for making the election to apply the safe harbor. The guidance also lists expenses that are not covered by the safe harbor. Rev. Proc. 2021-20 is effective for any tax year ending in calendar year 2020 and for the immediately subsequent tax year. <a href="/lr/resolve//2d75d">Rev. Proc. 2020-51</a> is obsolete.

The IRS has issued guidance (Rev. Proc. 2021-20) providing a safe harbor for some taxpayers that received a loan through the Paycheck Protection Program and did not deduct otherwise deductible expenses paid or incurred during the tax year ending after March 26, 2020, and on or before December 31, 2020, that resulted in, or were expected to result in, forgiveness of the loan.

The IRS has issued guidance (Rev. Proc. 2021-20) providing a safe harbor for some taxpayers that received a loan through the Paycheck Protection Program and did not deduct otherwise deductible expenses paid or incurred during the tax year ending after March 26, 2020, and on or before December 31, 2020, that resulted in, or were expected to result in, forgiveness of the loan. The Coronavirus Aid, Relief, and Economic Security Act established the PPP to provide economic assistance to small businesses adversely affected by the COVID-19 crisis. Under the PPP as it existed before enactment of the Consolidated Appropriations Act, 2021, the Small Business Administration was permitted to guarantee the full principal amount of a covered loan (original PPP covered loan). An individual or entity that was eligible to receive an original PPP covered loan could receive forgiveness of the full principal amount of the loan up to an amount equal to the following costs incurred and payments made during the original PPP covered period: (1) payroll costs, (2) interest on a covered mortgage obligation, (3) any covered rent obligation payment, and (4) any covered utility payment Notice 2020-32, issued in April 2020, clarified that no deduction was allowed for an otherwise deductible expense if the payment of the expense resulted in forgiveness of an original PPP covered loan. In November 2020 the IRS determined in Rev. Rul. 2020-27 that a taxpayer incurring otherwise deductible expenses in its 2020 tax year could not deduct those expenses if, at the end of its 2020 tax year, the taxpayer had a reasonable expectation of reimbursement of the expenses in the form of covered loan forgiveness. At the same time, Rev. Proc. 2020-51 provided a safe harbor to address situations covered by Rev. Rul. 2020-27 in which the taxpayer’s expectation of covered loan forgiveness was not realized in a subsequent tax year. The COVID-related Tax Relief Act of 2020 (part of the Consolidated Appropriations Act, 2021) added new rules regarding the federal income tax consequences of forgiveness of original PPP covered loans, specifically providing that “no amount shall be included in the gross income of the eligible recipient by reason of forgiveness of indebtedness [on an original PPP covered loan and] no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of [that] exclusion from gross income.” As a result, Notice 2020-32 and Rev. Rul. 2020-27 became obsolete and Rev. Rul. 2021-2 was released to confirm that the prior guidance no longer stated the law accurately. Similarly, the legal premise underlying Rev. Proc. 2020-51 is no longer correct. Therefore, under the safe harbor in Rev. Proc. 2021-20, eligible taxpayers may elect to deduct otherwise deductible original eligible expenses on the taxpayer’s timely filed original federal income tax return or information return, as applicable, for the taxpayer’s first tax year following the 2020 tax year rather than filing an amended return or administrative adjustment request for the taxpayer’s 2020 tax year. The taxpayer must be a covered taxpayer as defined in the revenue procedure and satisfy all the time and manner requirements for making the election to apply the safe harbor. The guidance also lists expenses that are not covered by the safe harbor. Rev. Proc. 2021-20 is effective for any tax year ending in calendar year 2020 and for the immediately subsequent tax year. Rev. Proc. 2020-51 is obsolete.

Sec. 265 Expenses and interest relating to tax-exempt income

Sec. 161 Allowance of deductions

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IRS Provides Safe Harbor for Some PPP Loan Recipients