On April 22, 2021, the IRS issued Rev. Proc. 2021-20, which allows the recipient of an original Paycheck Protection Program (PPP) loan (the taxpayer) to deduct on its 2021 return expenses actually incurred in 2020 that were not previously allowed as deductions, so long as the taxpayer filed a timely 2020 federal income tax or information return on or before December 27, 2020.
Under the March 2020 CARES Act, the recipient of a PPP loan made between February 15, 2020 and December 31, 2020 (an original PPP covered loan) is eligible for loan forgiveness of the full principal of the loan up to the 2020 expenditures on 1) payroll costs, 2) interest on a covered mortgage obligation, 3) any covered rent obligation payment and 4) any covered utility payment (original eligible expenses).
But, in controversial IRS rulings, Notice 2020-32 and Rev. Rul. 2020-27 together provided that a taxpayer could not deduct an otherwise deductible expense that resulted in forgiveness of an original PPP covered loan or that the taxpayer reasonably expected would result in forgiveness. Rev. Proc. 2020-51 provided a safe harbor if it turned out that the loan was not in fact forgiven in a subsequent year.
This 2020 IRS guidance all became obsolete, however, when section 276(a)(1) of the Covid Tax Relief Act of 2020 (part of the Consolidation Appropriations Act, 2021) (Appropriations Act), effective as of the date of the CARES act, was enacted to provide that “no amount shall be included in the gross income of [the recipient of an original PPP covered loan] by reason of forgiveness of indebtedness [on that loan]” and “no deduction shall be denied … by reason of [that] exclusion from gross income.” Consequently, original eligible expenses are deductible. Rev. Rul. 2021-1 confirmed that the 2020 guidance was no longer accurate.
Now, under the safe harbor provision of Rev. Proc. 2021-20, a “covered taxpayer” may elect to deduct original eligible expenses on the taxpayer’s original timely filed federal income tax return or information return, or on a return for the taxpayer’s immediately subsequent tax year, i.e. a covered taxpayer that has already filed a 2020 return need not amend the return (or file an administrative adjustment request in the case of an information return). A covered taxpayer is any recipient of an original PPP covered loan that paid or incurred original eligible expenses during the 2020 taxable year; timely filed (including extensions) its return for 2020 on or before December 27, 2020; and did not deduct original eligible expenses because of the 2020 IRS guidance.
A covered taxpayer must make a valid election to apply this safe harbor provision by attaching to the relevant return a statement that the taxpayer is applying the safe harbor provision; giving the amount and date of the taxpayer’s original PPP covered loan; and including a list, with descriptions and amounts, of the original eligible expenses paid or incurred during the taxpayer’s 2020 taxable year that are being deducted.
NOTE: Rev. Proc. 2021-20 does not apply to the expanded list of expenses under the Appropriations Act—including, inter alia, software and cloud computing and purchase of PPE—for which the recipient of an original PPP covered loan may receive forgiveness, nor to subsequent PPP loans, i.e. PPP Second Draw Loans.