Insights

IRS Issues Guidance on Correcting Excluded Deductions
Due to Reliance on Old PPP Rules

The IRS has released guidance in Revenue Procedure 2021-20 which will allow taxpayers who reduced their deductions for expenses paid using forgiven Paycheck Protection Plan (PPP) loan proceeds to elect to take those deductions in the following taxable year, rather than amending their current year return.

PPP loans, created by the CARES Act, allow forgiveness if recipients meet certain criteria. Loan forgiveness is specifically excluded from taxable income. The IRS initially ruled that taxpayers must reduce deductions for expenses paid from loan proceeds if the loan was forgiven or expected to be forgiven. The Consolidated Appropriations Act (CAA), enacted on December 27, 2020, reversed this guidance and provided that those deductions are allowed in full.

This new guidance addresses taxpayers that filed returns reducing deductions before the CAA was enacted. The Revenue Procedure guidance is available specifically for taxpayers that filed a timely return on or before December 27, 2020, which excluded the deduction for expenses paid from PPP loan proceeds that were forgiven or are expected to be forgiven. Such taxpayers may elect to claim the lost deductions on the return for the following taxable year by attaching a statement to the return.

Election deadline. A taxpayer must make the election by attaching the statement described in section 3.04(2) of this revenue procedure to the taxpayer’s timely filed, including extensions, Federal income tax return or information return, as applicable, for the taxpayer’s first taxable year following the taxpayer’s 2020 taxable year in which the original eligible expenses were paid or incurred.

Requirements for statement. The statement required by section 3.04(1) of this revenue procedure must be titled “Revenue Procedure 2021-20 Statement” (and named RevProc2021-20.pdf for e-file attachments) and include the following information:

1. The taxpayer’s name, address, and social security number or taxpayer-identification
2. A statement that the taxpayer is applying the safe harbor provided by section 3.01 of this revenue procedure;
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 taxpayer during the taxpayer’s 2020 taxable year that are reported on the Federal income tax return or information return, as applicable, for the taxpayer’s first taxable year following that 2020 taxable year.

The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation