How Rev. Proc. 2020-24 Affects PPP Expense Deductions

The Paycheck Protection Program (PPP), established under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, provided a financial lifeline to businesses during the COVID-19 pandemic. These loans were designed to help employers maintain payroll and cover other essential operational costs. While the loans offered the attractive feature of potential forgiveness, this benefit introduced questions regarding the tax treatment of the very expenses the loans were meant to cover.

The Expense Deductibility Issue

The initial confusion over the tax treatment of PPP loans stemmed from guidance issued by the Internal Revenue Service (IRS). In April 2020, Notice 2020-32 stated that expenses paid with forgiven PPP loan proceeds were not deductible. This position was based on Internal Revenue Code (IRC) Section 265, which prevents a “double tax benefit.” Since loan forgiveness was excluded from a business’s gross income, allowing a deduction for expenses paid with those same tax-free funds was considered an improper second benefit.

This interpretation meant businesses could not deduct ordinary business expenses, such as payroll, rent, and utilities, if paid with PPP funds and the business expected the loan to be forgiven. The IRS later amplified this position in Revenue Ruling 2020-27, clarifying that this rule applied even if the business had not yet formally applied for or received forgiveness by the end of the tax year. This created the prospect of a higher tax liability than anticipated.

The Safe Harbor for Non-Forgiven Loans

In response, the IRS issued Revenue Procedure 2020-51, which established a safe harbor for certain taxpayers. This guidance was for those whose loans were ultimately not forgiven. A taxpayer could deduct eligible expenses under this procedure if they were in one of two situations. The first scenario covered taxpayers who applied for PPP loan forgiveness but had their application denied by the lender, either in whole or in part.

The second situation was for taxpayers who ultimately decided not to seek forgiveness for their PPP loan. For businesses in either of these categories, Revenue Procedure 2020-51 allowed them to claim deductions for the qualified business expenses paid for with the loan proceeds. This ensured that businesses that had to repay their PPP loans were not also penalized by losing tax deductions.

How to Claim the Safe Harbor

To use the relief offered by Revenue Procedure 2020-51, taxpayers had to attach a statement to their federal income tax return for the year the expenses were incurred. This statement must be titled “Revenue Procedure 2020-51 Statement” and contain specific information to be valid. The required information included:

• The taxpayer’s name, address, and taxpayer identification number (TIN).
• The amount of the PPP loan and the date it was disbursed.
• A declaration that the taxpayer was applying the safe harbor.
• The total amount of loan forgiveness that was denied or not sought.
• The amount of the eligible expenses being claimed as a deduction on the return.

Subsequent Legislative Changes

The debate over the deductibility of PPP expenses was ultimately settled by Congress. In late December 2020, the Consolidated Appropriations Act, 2021 (CAA) was signed into law. This legislation directly addressed the issue by stating that “no deduction shall be denied or reduced” by reason of the income exclusion for PPP loan forgiveness. This provision overruled the IRS’s position and confirmed that businesses could deduct expenses paid with forgiven PPP loans.

This legislative change rendered the safe harbor in Revenue Procedure 2020-51 unnecessary for most taxpayers. Following the passage of the CAA, the IRS issued Revenue Ruling 2021-2, which made the previous guidance in Notice 2020-32 and Revenue Ruling 2020-27 obsolete. The safe harbor procedure remained relevant only for a narrow set of circumstances, such as for taxpayers whose loan forgiveness was denied or who needed to amend 2020 tax returns filed under the old IRS guidance.