As discussed in a previous post, the Internal Revenue Service (IRS) issued Revenue Ruling 2020-27 which states that if there is a reasonable expectation of loan forgiveness, regardless of whether the borrower files a forgiveness application in 2020 or 2021, the expenses are non-deductible for year-end 2020.
In addition to this, the IRS issued Revenue Procedure 2020-51 which addresses what happens when some or all of the PPP loan is not forgiven or when the borrow decides not to file for forgiveness. Through this Revenue Procedure, the IRS established a “safe harbor” for taxpayers. In order to meet the safe harbor requirements, the taxpayer must:
- Have paid or incurred eligible expenses under the PPP loan, for which no deduction was permitted in 2020 under the Revenue Ruling 2020-27; and
- Have applied for loan forgiveness in 2020, or
- Intends to apply for forgiveness in 2021.
If these conditions are met, the safe harbor allows for a deduction of the unforgiven eligible expenses either in 2020 by filing an amended tax return or an administrative adjustment request (AAR) or by including the deduction on a 2021 timely filed (including extensions) original income tax return.
**Please note, the Consolidated Appropriation Act of 2021 contains additional COVID-19 relief provisions which, if passed, will impact PPP deductibility.