IRS allows PPP deduction fix without amending


The IRS has released guidance (Rev. Proc. 2021-20) allowing 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.

PPP loans were created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to allow for forgiveness if recipients meet certain criteria. The loan forgiveness is specifically excluded from taxable income, but the IRS initially ruled that taxpayers must reduce their deductions for expenses paid out of loan proceeds if expected would be forgiven. The Consolidated Appropriations Act, enacted on Dec. 27, 2020, reversed this guidance and provided that deductions are allowed in full.

The new IRS guidance addresses taxpayers that filed returns reducing their deductions before the legislative fix was enacted. The IRS safe harbor is available specifically for taxpayers that filed a timely return on or before Dec. 27, 2020, that excluded the deduction for expenses paid out of proceeds from PPP loan that was forgiven or expected to be forgiven. These taxpayers may elect to claim the lost deductions on the return for the following taxable year by attaching a statement to the return. The election will allow taxpayers to avoid amending their return.

The IRS guidance does not address when in the forgiveness process the loan ceases to be treated as a loan for tax purposes and becomes tax-exempt income, which can affect basis and other return items.




Tax professional standards statement

This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.


More tax hot topics