IRS Establishes Safe Harbor for PPP Non-Compliance
The Internal Revenue Service (IRS) recently announced a safe harbor for small businesses that received Paycheck Protection Program (PPP) loans in 2020. As Washington D.C. tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, explains, the safe harbor applies specifically to small businesses that failed to deduct certain expenses based on IRS guidance issued prior to December 2020.
Small Businesses that Failed to Deduct Eligible Expenses Can Use PPP Safe Harbor in 2021
While the PPP afforded a much-needed lifeline to many small businesses that faced financial struggles as a result of lockdowns during the COVID-19 pandemic, it also left many important questions unanswered. The IRS and the Small Business Administration (SBA) attempted to provide guidance, but this guidance still failed to supply PPP loan recipients with all of the information they needed in order to comply with the law. As a result, many loan recipients (and loan applicants) made mistakes; and, despite the lack of clarity, these mistakes triggered a wave of enforcement actions by the IRS and the U.S. Department of Justice (DOJ).
In addition to making mistakes that violated the terms of the PPP, some small businesses also made mistakes that resulted in the failure to claim available tax deductions. To address this issue, the IRS has established a safe harbor that these small businesses can utilize when filing their tax returns in 2021. According to an IRS News Release, the safe harbor is intended to benefit, “certain businesses that received first-round Paycheck Protection Program (PPP) loans but did not deduct any of the original eligible expenses because they relied on guidance issued before the enactment of tax relief legislation in December of 2020.”
Revenue Procedure 2021-20 provides more information on eligibility for the IRS’s PPP safe harbor. For example, Revenue Procedure 2021-20 notes that the safe harbor allows small businesses to deduct expenses that correspond to payroll costs, interest on covered mortgage obligations, covered rent obligation payments, and covered utility payments paid with PPP loan funds. Revenue Procedure 2021-20 also specifies that small businesses can take the relevant deductions on their, “timely filed original Federal income tax return or information return, as applicable, for the . . . first taxable year following the . . . 2020 taxable year.”
PPP Loan Compliance Presents Enforcement Risks for Small Businesses
The recently-announced safe harbor does not apply to all expenses paid with PPP loan funds, nor does it protect small businesses that have made filing mistakes resulting in underreporting or underpayment of federal income tax liability. As a result, when filing their 2021 returns, small businesses that received PPP loans must be very careful to avoid mistakes that could lead to IRS (or DOJ) scrutiny. If contacted by federal agents with the IRS or DOJ, PPP loan recipients will need to engage experienced legal counsel promptly.
Request an Appointment with Washington D.C. Tax Lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group
Washington D.C. tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, has helped numerous small businesses navigate their tax obligations during the COVID-19 pandemic. If you have questions or concerns about dealing with the IRS, call 202-349-4033, email firstname.lastname@example.org or contact us online to arrange a confidential consultation.