Rev. Proc. 2021-48: Safe Harbor for PPP Expense Deductions

Revenue Procedure 2021-20 provides a procedural solution, known as a safe harbor, for certain taxpayers who received loan forgiveness under the Paycheck Protection Program (PPP). This guidance addresses a specific timing issue that emerged from the interaction between tax law and subsequent legislative updates. It allows taxpayers who had already filed tax returns under previous IRS guidance to deduct eligible business expenses paid with forgiven PPP funds. This procedure simplifies the process of claiming these deductions without needing to file an amended return.

Background on PPP Expense Deductibility

This safe harbor addresses a conflict between legislation and regulatory interpretation. The Coronavirus Aid, Relief, and Economic Security (CARES) Act established the PPP and specified that loan forgiveness would be excluded from a borrower’s gross income for tax purposes. However, the IRS subsequently issued Notice 2020-32 and Revenue Ruling 2020-27, which stated that otherwise deductible business expenses paid for with forgiven PPP loan proceeds could not be deducted. This interpretation was based on the principle of preventing a double tax benefit.

This created uncertainty for businesses that had relied on the deductibility of common expenses like payroll, rent, and utilities. In December 2020, Congress passed the Consolidated Appropriations Act, 2021 (CAA), which legislatively overturned the IRS’s position. The CAA clarified that expenses paid with forgiven PPP funds were deductible.

Many businesses had already filed their 2020 federal income tax returns before the CAA was enacted. These early filers had followed the then-current IRS guidance and did not deduct their PPP-funded expenses, resulting in a higher taxable income.

Eligibility for the Safe Harbor

To use the simplified correction method offered by Revenue Procedure 2021-20, a taxpayer must meet a specific set of criteria, defining them as a “Covered Taxpayer.” The primary requirement is that the taxpayer must have received a PPP loan and paid or incurred eligible expenses during their 2020 taxable year. These are the same types of expenses, such as payroll costs, mortgage interest, rent, and utility payments, that qualified for loan forgiveness.

A taxpayer must have filed a federal income tax return for the tax year beginning in 2020 on or before December 27, 2020. On that filed return, the taxpayer must not have deducted the eligible expenses because they were relying on the now-superseded IRS guidance.

Finally, the taxpayer must have received, or reasonably expect to receive, forgiveness for their PPP loan. Taxpayers who meet all these conditions are permitted to use the streamlined process to claim the deductions without the administrative burden of amending their 2020 return.

How to Make the Safe Harbor Election

A Covered Taxpayer makes the safe harbor election by attaching a formal statement to their federal income tax return for the year immediately following the one in which the expenses were paid. For a taxpayer correcting a 2020 return, this means attaching the statement to their 2021 tax return. This approach allows the taxpayer to deduct the 2020 expenses on their 2021 return.

The statement itself has specific content requirements to be valid. It must be clearly labeled “Rev. Proc. 2021-20 Statement” at the top. The document must include the taxpayer’s name, address, and Social Security Number or Employer Identification Number.

The statement must explicitly declare that the taxpayer is applying the safe harbor provided by Revenue Procedure 2021-20. It also needs to list the amount and date of the PPP loan disbursement and the total amount of PPP loan forgiveness that was received. Finally, the taxpayer must list each of the otherwise deductible expenses being claimed, specifying the amount of the deduction and the line number on the tax form where the deduction would have originally been reported.