What Was Rev Proc 2020-50 for PPP Loan Deductions?

Revenue Procedure 2020-51 was guidance issued by the Internal Revenue Service (IRS) during the COVID-19 pandemic. It addressed how businesses should handle the tax deduction of expenses paid for using funds from a Paycheck Protection Program (PPP) loan. The purpose of this guidance was to provide a “safe harbor,” a defined method that, if followed, ensures a taxpayer complies with a particular rule.

This procedure became necessary because PPP loans were designed to be forgivable if used for costs like payroll, rent, and utilities. The core issue was the timing of when a business could claim deductions, especially when the request for loan forgiveness was uncertain or denied. Rev Proc 2020-51 established rules for deducting these expenses in the year they were paid or in a future year, depending on the outcome of their forgiveness application.

The Original Deduction Issue for PPP Loans

The confusion surrounding the deductibility of expenses paid with PPP loans stemmed from IRS Notice 2020-32. This guidance established the IRS’s position that if a business paid for eligible expenses with PPP loan proceeds and reasonably expected that loan to be forgiven, it could not deduct those expenses. This stance was based on a tax principle intended to prevent a “double tax benefit,” as the loan forgiveness itself was excluded from taxable income. This interpretation created a challenge for businesses, as forgiveness was not guaranteed and the application process occurred after the expenses were paid.

The IRS reinforced this position with Revenue Ruling 2020-27, which further clarified that expenses could not be deducted in the year they were incurred if the taxpayer expected forgiveness, even if they had not yet submitted a forgiveness application. This created an accrual problem for many businesses, as it created a mismatch between financial and tax accounting and generated uncertainty for business owners. This guidance was met with pushback from tax professionals and business groups who argued it contradicted the intent of the CARES Act, which established the PPP. They contended that Congress intended for the program to provide financial relief, and denying the deduction undermined that goal.

The Safe Harbor Solution

In response to the uncertainty, the IRS issued Revenue Procedure 2020-51 in November 2020, providing a formal safe harbor. This procedure created a specific, protected method for “covered taxpayers” who paid or incurred eligible expenses in their 2020 taxable year but did not deduct them on their original return because they expected the associated PPP loan to be forgiven. The safe harbor outlined two primary scenarios in which a taxpayer could then claim the deductions.

The first situation was when a taxpayer applied for loan forgiveness, but the lender or the Small Business Administration (SBA) partially or fully denied the request. In this case, the taxpayer was permitted to deduct the portion of the expenses corresponding to the amount of the loan that was not forgiven. The second scenario covered taxpayers who, for their own reasons, decided to withdraw their forgiveness application or irrevocably decided not to seek forgiveness in the first place. Under this part of the safe harbor, a business could deduct the eligible expenses once it made that final decision not to pursue forgiveness.

The safe harbor provided flexibility in the timing of the deduction. A taxpayer who qualified could choose to deduct the expenses on an amended 2020 tax return. Alternatively, the procedure allowed the taxpayer to deduct the expenses on their tax return for the subsequent taxable year—the year in which the forgiveness was denied or the decision not to seek it was made. This option was helpful as it meant a taxpayer might not have to go through the process of amending a previously filed return.

How to Make the Safe Harbor Election

To use the relief provided by Revenue Procedure 2020-51, a taxpayer had to make a formal election by attaching a specific statement to their federal income tax return. This return could be the original 2020 return, an amended 2020 return, or the return for the subsequent tax year. The procedure mandated that the title of the document be “Revenue Procedure 2020-51 Statement” for the IRS to properly identify the election.

The statement required specific information, including:

• The taxpayer’s name, address, and taxpayer identification number (TIN).
• An explicit declaration that the taxpayer was applying the safe harbor.
• The total amount of the PPP loan the taxpayer received.
• The full amount of the eligible expenses being deducted on that tax return.
• A declaration specifying which of the safe harbor conditions the taxpayer met, stating they were either denied forgiveness or had irrevocably decided not to seek it.

Subsequent Legislation and Obsolescence

The framework established by the IRS notices and Rev Proc 2020-51 was short-lived. In late December 2020, Congress passed the Consolidated Appropriations Act, 2021 (CAA). This legislation directly addressed the PPP loan deduction controversy by clarifying the original intent of the CARES Act. The CAA explicitly stated that no deduction would be denied by reason of the exclusion from gross income of the forgiven PPP loan. This action overruled the IRS’s position and made it clear that businesses could receive both tax-free loan forgiveness and the tax deduction for the associated business expenses. This change was retroactive, applying to the 2020 tax year.

Following the enactment of the CAA, the IRS officially acknowledged the change. In January 2021, the agency issued Revenue Ruling 2021-2, which formally declared Notice 2020-32 and Revenue Ruling 2020-27 obsolete. Because the underlying problem that Rev Proc 2020-51 was created to solve no longer existed, the safe harbor itself became obsolete for most taxpayers. After the CAA, businesses could simply deduct their eligible expenses on their 2020 tax returns without needing to worry about their expectation of forgiveness.

While Rev Proc 2020-51 is no longer a relevant piece of guidance for current or future tax filings, its history is important for understanding the evolution of PPP-related tax law. Taxpayers and practitioners who filed 2020 returns before the CAA was passed may have relied on this safe harbor, so understanding its provisions remains relevant for interpreting tax positions taken during that specific window of time.