Further guidance issued on tax treatment of PPP loan forgiveness

By Paul Bonner

In three revenue procedures (Rev. Procs. 2021-48, 2021-49, and 2021-50) the IRS provided guidance Thursday on the treatment of amounts excluded from taxpayers' gross income in connection with forgiveness of Paycheck Protection Program (PPP) loans. The AICPA had requested guidance in a March 15, 2021, letter to the IRS.

While it is excluded from taxpayers' gross income, tax-exempt income resulting from PPP loan forgiveness nonetheless must be included in gross receipts for certain other purposes, which include the gross receipts test under Sec. 448(c) for a "small business taxpayer" eligible to use the cash method of accounting and several other generally favorable tax accounting provisions. Another such inclusion is for certain return filing requirement thresholds for tax-exempt organizations under Sec. 6033.

As the AICPA had suggested, a range of issues are addressed in the guidance, including the timing for tax purposes of when PPP loan forgiveness is received or accrued, how partners and partnerships may allocate PPP forgiveness as exempt income and allocate deductions resulting from expenditures attributable to the use of forgiven PPP loan proceeds, and how eligible partnerships subject to audit procedures under the Bipartisan Budget Act of 2015, P.L. 114-74, (BBA partnerships) may file amended Forms 1065, U.S. Return of Partnership Income, and issue amended Schedules K-1, Partner's Share of Income, Deductions, Credits, etc., to partners in accordance with these procedures.

Rev. Proc. 2021-48: Timing issues

Rev. Proc. 2021-48 covers the timing of receipt of PPP forgiveness tax-exempt income. Taxpayers may treat such income as received or accrued when either (1) expenses eligible for forgiveness are paid or incurred; (2) an application for PPP loan forgiveness is filed; or (3) PPP loan forgiveness is granted. The revenue procedure also describes adjustments that must be made on an amended return; information return; or, for certain partnerships, an administrative adjustment request, when a PPP loan is only partly forgiven.

Rev. Proc. 2021-49: Allocation issues

Rev. Proc. 2021-49 prescribes how partners and partnerships may allocate among partners under Sec. 704(b) their distributive share of PPP loan forgiveness tax-exempt income and deductions resulting from expenditures attributable to the use of forgiven PPP loans and make corresponding adjustments to the partners' bases in their partnership interests under Sec. 705.

For corporations, the revenue procedure provides guidance regarding similar adjustments of stock basis by subsidiary members of consolidated groups under Sec. 1502 and Regs. Sec. 1.1502-32. This revenue procedure's provisions also apply to certain grant proceeds and subsidized payments of certain interest and fees.

Rev. Proc. 2021-50: Amended returns

Rev. Proc. 2021-50 allows eligible BBA partnerships to file amended Forms 1065 and issue amended Schedules K-1 for the above purposes for tax years ending after March 27, 2020. These amended returns and Schedules K-1 must be filed or furnished on or before Dec. 31, 2021.

BBA partnerships are eligible if they filed Forms 1065 and furnished Schedules K-1 for the partnership tax year ending after March 27, 2020, and before the issuance of Rev. Procs. 2021-48 and 2021-49 and meet certain other listed requirements of these revenue procedures.

Paul Bonner (Paul.Bonner@aicpa-coma.com) is a JofA senior editor.

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