New chance for old Paycheck Protection Program deductions, says IRS

IRS just announced a new safe harbor for companies that relied on Paycheck Protection Program deductions-related guidance issued before Dec. 27, 2020.

Your business may take some additional expense deductions. That’s for businesses that took a PPP loan in Round 1.

The denied deductions were later allowed under the Consolidated Appropriations Act.

Does your business qualify for the safe harbor?

In order to take advantage of the new safe harbor for the Paycheck Protection Program deductions, courtesy of IRS, your business must meet four conditions spelled out in IRS Revenue Procedure 2021-20:

1. You received an original PPP covered loan
2. Your company paid or incurred original eligible expenses during Tax Year 2020
3. On or before December 27, 2020, you timely filed (including extensions) a federal income tax return or information return for Tax Year 2020, and
4. Your business didn’t deduct the original eligible expenses on your federal tax return because they either resulted in forgiveness of the original PPP covered loan or you reasonably expected at the end of the 2020 taxable year that the expenses would result in such forgiveness.

Which expenses count toward safe harbor

Under the previous guidance, businesses couldn’t deduct the corresponding expenses when the PPP loans covered these:

• payroll costs
• interest on covered mortgage obligations
• covered rent obligation payments, and
• covered utility payments.

Thanks to the new safe harbor, you can claim all of those expenses as Paycheck Protection Program deductions.