New IRS Guidance on PPP Loan Forgiveness Tax Treatment
December 15, 2021
The IRS has had a change of heart and released three revenue procedures that give taxpayers more choices as to when they can recognize the tax-exempt income resulting from their forgiven Paycheck Protection Program (“PPP”) loans.
Revenue Procedure (Rev. Proc.) 2021-48 offers taxpayers three options to report amounts that are excluded from gross income (tax-exempt income) in connection with the complete or partial forgiveness of PPP loans. The tax-exempt income may be reported as received or accrued:
- as eligible expenses are paid or incurred,
- when an application for PPP Loan forgiveness is filed, or
- when PPP Loan forgiveness is granted.
Many business taxpayers and their owners have already filed their 2020 income tax returns. If taxpayers choose an option under Rev Proc 2021-48 that is different than that followed in filing their 2020 returns, amended returns may be required.
Rev. Proc. 2021-49 provides guidance for partnerships and consolidated groups regarding tax-exempt income and deductions relating to PPP and certain other COVID-19 relief programs. More specifically, for partners and their partnerships there is guidance regarding:
- allocations under section 704(b) of the Internal Revenue Code of tax-exempt income arising from the forgiveness of PPP loans, the receipt of certain grant proceeds, or the subsidized payment of certain principal, interest and fees;
- allocations under section 704(b) of deductions resulting from expenditures attributable to the use of forgiven PPP loans or certain grant proceeds, or subsidized payments of certain interest and fees; and
- the corresponding adjustments to be made with respect to the partners’ bases in their partnership interests under section 705
This revenue procedure also provides guidance under section 1502 and Treasury Regulation 1.1502-32 regarding the corresponding basis adjustments for stock of subsidiary members of consolidated groups as a result of tax-exempt income arising from certain forgiven PPP Loans, grant proceeds, or subsidized payment of certain principal, interest, and fees.
Rev. Proc. 2021-50 provides administrative ease to partnerships subject to the centralized partnership audit regime introduced in the Bipartisan Budget Act of 2015 (“BBA”) that want to change their recognition of PPP Loan forgiveness. Eligible BBA partnerships that want to choose one of the options in Rev. Proc. 2021-48, may file amended partnership returns for taxable years ending after March 27, 2020, using a Form 1065, U.S. Return of Partnership Income (Form 1065), with the “Amended Return” box checked, and issue an amended Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc. (Schedule K-1), to each of its partners. This amended return filing is in lieu of standard procedures for filing an administrative adjustment request to make such a change. In order to take advantage of the option provided in this revenue procedure, amended partnership returns must be filed, and corresponding Schedules K-1 must be furnished, on or before December 31, 2021.
For questions regarding PPP loans in general, please contact our PPP loan consulting team. For questions regarding the choices for recognition of the PPP loan forgiveness income, please contact your Cherry Bekaert tax advisor.