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.
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