Revenue Procedure 2021-20 provides a safe harbor for PPP loan recipients that received loans before the COVID-related Tax Relief Act of 2020 (part of the Consolidated Appropriations Act, 2021) passed on December 27, 2020). This Revenue Procedure creates a safe harbor election for certain taxpayers. Taxpayers that filed a 2020 tax return and did not deduct certain expenses paid or incurred after March 26, 2020 and before December 31, 2020 that were attributed to the forgiveness of their PPP loan, may elect to deduct these expenses on their Federal income tax return for the first timely filed taxable year following their 2020 taxable year, instead of filing an amended 2020 tax returns. For more information about making the safe harbor election see https://www.irs.gov/pub/irs-drop/rp-21-20.pdf.
Prior to Revenue Procedure 2021-20, expenses that would otherwise be deductible were not allowed to be taken on the 2020 income tax return if they were considered to be expenses reimbursed by loan forgiveness. On December 27, 2020, the Appropriations Act, specifically section § 7A(i) of the Small Business Act provides, 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.” Therefore, the forgiven PPP loan is not includible in taxable income and all pertaining expenses are now deductible.
Biana Mester, Enrolled Agent