Does Your Business Qualify for the IRS’ PPP Fraud Safe Harbor?

Offshore Account Update

Posted on April 16, 2021 |

The Internal Revenue Service (IRS) recently announced a safe harbor for certain Paycheck Protection Program (PPP) loan recipients. The safe harbor allows eligible loan recipients to claim deductions that they failed to claim in 2020. As New Jersey tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, explains, small businesses must meet certain requirements in order to claim safe harbor protection; and, when claiming additional deductions under the safe harbor, they must be careful to ensure that they are otherwise in full compliance with the Coronavirus Aid, Relief and Economic Security (CARES) Act, the Tax Relief Act of 2020, and other pertinent federal tax laws.

What is the IRS’ PPP Safe Harbor?

The PPP safe harbor allows eligible 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. The safe harbor allows businesses that did not claim these deductions in 2020 to claim them on their returns for the subsequent year rather than filing an amendment.

What Small Businesses Can Use the PPP Safe Harbor?

Small businesses can use the PPP safe harbor if they failed to deduct qualifying expenses based on prior IRS guidance. Initially, the IRS indicated that PPP loan recipients would not be able to deduct PPP-related expenses. However, this changed with the Consolidated Appropriations Act enacted on December 27, 2020. An IRS News Release announcing the safe harbor indicates that it is available to small 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.”

What Factors Should Small Businesses Consider Before Deducting PPP-Related Expenses?

Prior to deducting PPP-related expenses from 2020 on their 2021 tax returns, small businesses should first ensure that they are eligible to do so. They should also make sure they have fully complied with the terms of the PPP. This includes ensuring that: (i) they qualified to receive a PPP loan, (ii) their PPP loan applications were true and correct, (iii) they used their PPP loan funds for eligible expenses, and (iv) they submitted a valid certification for loan forgiveness (if applicable).

What Should Business Owners Do if They Have Concerns about PPP Loan Tax Compliance?

If you have concerns about your small business’s receipt or use of PPP loan funds, what should you do? At this point, you need to be very careful. The IRS is one of several federal agencies that are aggressively targeting small businesses and their owners in PPP loan fraud investigations. These investigations are leading to prosecution for tax evasion, bank fraud and other serious crimes, and businesses and their owners are facing substantial penalties in many cases.

Contact New Jersey Tax Lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group

If you own a business and have questions about any aspect of PPP compliance, we encourage you to get in touch. To schedule a confidential consultation with New Jersey tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, call 201-355-8202, email or contact us online today.

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