IRS issues PPP expense deduction safe harbor for fiscal year taxpayers
TAX ALERT |
Authored by RSM US LLP
The IRS recently published Rev. Proc. 2021-20, providing a safe harbor regarding the accounting period in which to claim deductions paid for with PPP funds. This safe harbor allows taxpayers to elect to deduct expenses in the first tax year after the taxpayer’s 2020 taxable year return versus filing an amended return or administrative adjustment request.
To give some history, the SBA was instructed to administer PPP loans through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). At the time, it was known that these loans could be forgiven if the full amount of the loan was incurred for qualified costs: payroll costs, interest on a covered mortgage obligation, any covered rent obligation payment and any covered utility payment. Pursuant to the CARES Act, forgiven PPP amounts were excluded from gross income.
The IRS issued a notice and a revenue ruling stating that while the loan forgiveness was exempt from gross income, the amounts paid with such funds were not deductible expenses. In essence, PPP became a taxable item. This was not a popular conclusion for taxpayers and PPP borrowers requested Congress to provide a ‘fix’ for this unintended consequence. Then, on Dec. 27, 2020, the Consolidated Appropriations Act, 2021 became law and allowed the deduction of expenses related to loans forgiven or expected to be forgiven.
The delay in legislative fix created issues for fiscal year taxpayers. Due to the prior IRS position of nondeductibility, fiscal year taxpayers may have already filed their 2020 tax returns prior to Congress passing the PPP deductibility fix. The safe harbor provided in Rev. Proc. 2021-20 allows impacted taxpayers a choice in how to claim their now allowed PPP expenses.
Safe Harbor Election
A taxpayer may elect to deduct expenses related to forgiven PPP loans on a timely filed, including extensions, original Federal income tax return or information return in the immediate subsequent year. The taxpayer does not need to amend their return or make an administrative adjustment request. To qualify the taxpayer must be a ‘Covered Taxpayer’ and the election must fulfill certain requirements contained within the revenue procedure.
A Covered Taxpayer must satisfied all of the follows conditions:
1. The taxpayer received an original PPP covered loan
2. The taxpayer paid or incurred original eligible expense during its 2020 taxable year
3. On or before Dec. 27, 2020, the taxpayer timely filed, including extensions, a Federal income tax return or information return, as applicable, for its 2020 taxable year
4. On its Federal income tax return or information return, as applicable, the taxpayer did not deduct the original eligible expenses because--
a. The expenses resulted in forgiveness of the original PPP covered loan; or
b. The taxpayer reasonably expected at the end of the 2020 taxable year that the expenses would result in such forgiveness.
The election must be made on the covered taxpayer’s timely filed, including extensions, Federal income tax return or information return for the first taxable year following its 2020 taxable year. A statement must also be attached to the filed return titled ‘Revenue Procedure 2021-20 Statement’ (and named RevProc2021-20.pdf for e-file attachments) and include the following information:
1. The Covered Taxpayer’s name, address and social security number or taxpayer identification number;
2. A statement that the Covered Taxpayer is applying the safe harbor;
3. The amount and date of disbursement of the taxpayer’s original PPP covered loan; and
4. A list, including descriptions and amounts, of the original eligible expenses paid or incurred by the Covered Taxpayer during the Covered Taxpayer’s 2020 taxable year that are reported on the Federal income tax return or information return, as applicable, for the Covered Taxpayer’s first taxable year following that 2020 taxable year.
New expenses not included as part of the original eligible expenses are not eligible to be deducted through this election by a Covered Taxpayer. Also, any expenses related to the PPP Second Draw are not original PPP covered loans and therefore are not eligible expenses.
Finally, this election does not protect the IRS from examining any issues related to claimed deductions and requesting additional information or documentation to verify any amounts described in the statements required for this election.
An impacted taxpayer should discuss the impact of amending returns or following this safe harbor with its tax advisor.
This article was written by Ryan Corcoran , Cameron Thomas and originally appeared on 2021-04-27.
2020 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
GreerWalker is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.
For more information on how GreerWalker can assist you, please call (704) 377-0239.