Welcome to 2022 tax season! As the vast majority of businesses, small and large, were affected by the COVID-19 pandemic, many companies received support through the Paycheck Protection Program. However, there were many question marks with the Paycheck Protection Program, such as the timing of forgiveness and if eligible expenses are deductible for federal income tax purposes.
Timing of PPP loan forgiveness
As we all know, the Paycheck Protection Program (“PPP”) was created to assist businesses in paying their employees’ paychecks. If the funds received from PPP were used for qualified expenses, the amount of the loan was forgiven. Recently, the IRS released guidance on the timing of PPP Loan forgiveness. With some business owners not receiving their forgiveness letter in 2021, the question arose when the PPP loan will be forgiven for tax-exempt income purposes.
The IRS stated that taxpayers may treat such income as received or accrued when either:
- expenses eligible for forgiveness are paid or incurred;
- an application for PPP loan forgiveness is filed; or
- PPP loan forgiveness is granted.
Thus, a taxpayer who submitted their application for forgiveness in 2021, but has not been granted forgiveness in the 2021 tax year, may choose the date of the forgiveness application, the date the forgiveness is granted, or the when eligible expenses are paid or incurred.
Expenses paid with 2020 PPP loans
There is a new safe harbor for certain businesses that received the first round of PPP loans but did not deduct any of the actual eligible expenses because they relied on guidance issued before the enactment of the Consolidated Appropriations Act. The guidance states that taxpayers who relied on the prior guidance (eligible expenses are not deductible) and who can meet the requirements of this new guidance (“New Guidance”) may deduct eligible expenses in 2021.
The New Guidance states that taxpayers are not required to amend any returns previously filed for 2020, instead taxpayers may claim these eligible deductions on their 2021 tax returns. Taxpayers who fit this criteria will also need to meet additional requirements put forth in the New Guidance.
Who is a covered taxpayer?
Taxpayers must be a covered taxpayer and must satisfy all of the requirements for the time and manner of making the election to apply the safe harbor. A “covered taxpayer” is a taxpayer who meets all of the following:
- received an original PPP covered loan;
- paid or incurred eligible expenses in taxpayer’s 2020 tax year;
- timely filed all returns by December 27, 2020 for the taxpayer’s 2020 tax year; and
- on the 2020 returns, did not deduct any of the eligible expenses.
When can a taxpayer make the safe harbor election?
The timing and manner of making the safe harbor election is when the taxpayer files their 2021 return. When filing, the taxpayer must attach a statement to their 2021 return titled “Revenue procedure 2021-20 Statement.” If filing electronically, the PDF must be labeled, “RevProc2021-20.pdf.” The statement must include the following information:
- the covered taxpayer’s names, address, and EIN;
- a statement that the covered taxpayer is applying for the safe harbor in Revenue Procedure 2021-20;
- the amount and date of disbursement of the taxpayer’s original PPP loan; and
- a complete list, with descriptions and amounts, of the original eligible expenses paid or incurred by the covered taxpayer for the 2020 tax year.
It is thus important to understand this new guidance and discuss it with your tax professionals. As with any taxpayer, no one wants to leave money on the table. Those needing tax assistance may reach me at firstname.lastname@example.org or by phone at 239-344-1147.