Good news for small businesses that received a first round of the Paycheck Protection Program (PPP) loan. In the April 23rd release of Revenue Procedure 2021-20, the Internal Revenue Service (IRS) announced a safe harbor. Businesses that followed previous guidance under the Coronavirus Aid, Relief, and Economic Security (CARES) Act and did not deduct certain business expenses that had been paid with PPP funds, may have additional relief. The 2020 guidance stated small business taxpayers that received funds to cover the cost of wages, interest on specified mortgages, rent and utility payments, were not able to claim these as tax deduction. However, the December enactment of the Consolidated Appropriations Act of 2021 provides that small businesses may claim deductions for these expenses.
How to claim the Deduction
According to the Safe harbor, businesses that filed their 2020 tax return prior to the change, are eligible to deduct these expenses on their “timely” filed return for the year immediately following the subsequent taxable year, rather than filing an amended return for the 2020 year. The Revenue Procedure provides that the safe harbor election be made by attaching a statement titled, ‘Revenue Procedure 2021-20 Statement’ which should include the required information for the applicable return.
It is important to note that there is a limitation on the scope of the revenue procedure and that it applies only to returns that were originally filed on or before December 27, 2020. Meaning this safe harbor guidance will only be applicable to fiscal-year taxpayers whose year ended during 2020 and that has a tax return that was filed on or before the Consolidated Appropriations Act of 2021 was signed into law. Additionally, this guidance is not applicable to any second round draws of PPP loans. The IRS will not provide retroactive relief for expenses paid with PPP loans that are not deducted on the appropriate year’s tax return.
What does this mean?
The safe harbor provides that businesses that did not claim deductions for expenses paid with PPP loan funds in 2020 are permitted to claim these deductions on the following year’s return in 2021.
If taxes have not yet been filed, claim these deductions accordingly, as retroactive relief will not be applied for taxes filed after this guidance.
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