Did Your Small Business Receive a Paycheck Protection Program Loan? You May Be Eligible for a Safe Harbor

A safe harbor is now available to small businesses that received first-round Paycheck Protection Program (PPP) loans. The safe harbor allows recipients who filed their 2020 tax returns on or before Dec. 27, 2020, and didn’t deduct certain deductible expenses, the option to elect to deduct those expenses on their 2021 return rather than filing an amended return or administrative adjustment request for 2020.

ppp loanUnder previous guidance, businesses that received PPP loans to cover payroll costs, interest on covered mortgage obligations, covered rent obligation payments, and covered utility payments could not deduct corresponding expenses.

The Consolidated Appropriations Act of 2021, enacted December 27, 2020, allows businesses to claim these deductions even though they received PPP loans to cover original eligible expenses. These businesses can use the safe harbor provided by this guidance to deduct those expenses on the return for the immediately subsequent year.

The safe harbor applies only to original eligible expenses from a first-round PPP loan, and not to additional expenses that were added by the Consolidated Appropriations Act.

A taxpayer elects the safe harbor by attaching a statement to a federal income tax return or information return for the taxpayer’s first tax year following the 2020 tax year in which the original eligible expenses were paid or incurred.

Eligibility for the Safe Harbor

The taxpayer must meet the following requirements to be eligible to claim the safe harbor:

  1. The taxpayer received an original PPP covered loan;
  2. The taxpayer paid or incurred original eligible expenses during the taxpayer’s 2020 tax year;
  3. On or before December 27, 2020, the taxpayer timely filed, including extensions, a Federal income tax return or information return, as applicable, for the taxpayer’s 2020 tax year; and
  4. On the taxpayer’s Federal income tax return or information return, as applicable, the taxpayer did not deduct the original eligible expenses because:
    1. The expenses resulted in forgiveness of the original PPP covered loan; or
    2. The taxpayer reasonably expected at the end of the 2020 tax year that the expenses would result in such forgiveness.

Questions

If you have questions about the safe harbor or PPP loans, contact us today to discuss your specific situation.

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