Thanks to the far-reaching Consolidated Appropriations Act passed in December 2020, small businesses that used funds from a first round Paycheck Protection Program (PPP) loan to pay eligible expenses were also granted the right to take a deduction on their 2020 tax return – even if the PPP loan was forgiven (or was expected to be forgiven). However, many businesses relied on earlier guidance and did not take the eligible tax deductions.
Those early filers now have a reprieve, thanks to a new “safe harbor” ruling that allows taxpayers who filed a tax year 2020 return on or before Dec. 27, 2020, to deduct eligible expenses on their 2021 tax return rather than going through the process of filing an amended return or making an administrative adjustment request.
To be eligible to elect the safe harbor the taxpayer must satisfy certain requirements, including:
• The taxpayer received an original PPP covered loan;
• The taxpayer paid or incurred original eligible expenses during the taxpayer’s 2020 tax year;
• On or before Dec. 27, 2020, the taxpayer timely filed, including extensions, a federal income tax return or information return for the taxpayer’s 2020 tax year; and
• On the taxpayer’s federal income tax return or information return, 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 that forgiveness.
There are certain exclusions to the ruling, and the taxpayer must submit required documentation in order to elect to take the safe harbor in their 2021 tax return. Expenses paid with funds from a second round PPP loan are not eligible for the safe harbor.
If your business or organization was the recipient of a first round PPP loan and you did not deduct eligible expenses in an early tax return filing, you may be able to claim those deductions on next year’s tax return. For more details and information on eligibility and filing requirements, please contact Gray, Gray & Gray at (781) 407-0300.