December 7, 2021 - Tax Group News: IRS Provides Additional Guidance on Tax Treatment of Paycheck Protection Program Loan Forgiveness
By: Marc T. Finer
The Paycheck Protection Program (“PPP”) created under the CARES Act provided much needed economic relief to businesses and other organizations negatively impacted by the COVID-19 pandemic. One of the biggest benefits of the PPP is the ability of taxpayers to treat the loan forgiveness as tax-exempt income to the extent the loan proceeds were used for eligible expenses.
On November 17, the IRS issued three separate revenue procedures - Rev. Proc. 2021-48, Rev. Proc. 2021-49 and Rev. Proc. 2021-50 - to address the tax treatment of PPP loan forgiveness tax-exempt income.
Revenue Procedure 2021-48: Timing of Income Inclusion
Rev. Proc. 2021-48 addresses the timing of receipt or accrual of the tax-exempt income arising from PPP loan forgiveness. The revenue procedure provides that a taxpayer may treat this income as being received or accrued:
(1) as eligible expenses are paid or incurred,
(2) when the application for PPP loan forgiveness is filed, or
(3) when PPP loan forgiveness is granted.
Rev. Proc. 2021-48 also requires the taxpayer to make adjustments on an amended return, information return or administrative adjustment request (AAR) (for certain partnerships) if the taxpayer receives loan forgiveness for a lesser amount than the taxpayer previously treated as tax-exempt income.
Revenue Procedure 2021-49: Income Allocation Issues
Rev. Proc. 2021-49 provides guidance for partnerships regarding the allocations of tax-exempt income and deductions relating to PPP loan forgiveness and the receipt of grants and other subsidized payments under other COVID relief programs (e.g., Economic Injury Disaster Loan grants, Shuttered Venue Operators Grants). The revenue procedure also prescribes the corresponding adjustments to be made with respect to the partners’ bases in their partnership interests (i.e., their outside bases).
For corporations, the revenue procedure provides guidance regarding similar adjustments of stock basis by subsidiary members of consolidated groups.
Revenue Procedure 2021-50: Amended Returns
Rev. Proc. 2021-50 allows eligible partnerships subject to the centralized partnership audit rules under the Bipartisan Budget Act to file amended Forms 1065 and issue amended Schedules K-1 for tax years ending after March 27, 2020 to adopt the guidance set forth in Rev. Proc. 2021-48 and Rev. Proc. 2021-49. To take advantage of this option, amended partnership returns must be filed, and corresponding Schedules K-1 must be furnished, on or before December 31, 2021. A partnership that amends a return under Rev. Proc. 2021-50 may make additional changes, not related to the revenue procedures, on the amended return.
It may make sense for a partnership to amend its tax returns based on Rev. Proc. 2021-48 and Rev. Proc. 2021-49 if the increased tax basis or amounts at-risk resulting from the earlier timing of tax-exempt income caused by PPP loan forgiveness would allow the partners to deduct additional pass-through losses or receive tax-free distributions. The earlier timing of tax-exempt income may also benefit a selling partner for purposes of determining gain or loss on the sale of a partnership interest.
If you have any questions regarding Rev. Proc. 2021-48, Rev. Proc. 2021-49 or Rev. Proc. 2021-50 or how they might affect your business, please contact Marc T. Finer, Tax & Corporate Partner, at 860-240-6096 or firstname.lastname@example.org.