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PPP Loan Forgiveness – When is it Recognized?

On November 18, 2021, the IRS released three Revenue Procedures regarding PPP loan forgiveness and the tax effects. PPP loans were authorized to assist small businesses adversely affected by the COVID-19 pandemic. With new guidance from the IRS, taxpayers may be able to amend their 2020 tax returns to take advantage of the Revenue Procedures. This included:

  • Additional basis for businesses and their owners, and
  • An opportunity for BBA partnerships to file amended returns for this issue and any additional corrections by December 31, 2021. The ability to file amended returns for BBA partnerships has now passed and they must now do an AAR (Administrative Adjustment Request.)

Taxpayers are eligible to receive forgiveness on loans equal to the eligible expenses incurred and paid during the covered period. Such forgiveness is excluded from gross income under §7A(i) of the Small Business Act, therefore treated as tax-exempt income for partnerships under §705 & S corporations under §1366 of the Code.

Rev. Proc. 2021-48

Taxpayers have 3 options for when to treat PPP loans as tax-exempt income:

  1. When eligible expenses are paid or incurred.
  2. When the taxpayer applies for forgiveness.
  3. When PPP loan forgiveness is granted.

Eligible expenses under the 1st applicable forgiveness period include but are not limited to, payroll, mortgage interest on a covered loan, rent, and utilities. In determining which of the 3 options to choose, considerations include but are not limited to the following:

  • Basis in a business entity
  • At-risk basis
  • Gross Receipts under §448(c) & 6033
  • Modified AGI for individual taxpayers

Rev. Proc. 2021-49

Guidance for partners, partnerships, and consolidated groups are covered under this Revenue Procedure.

Deductions for partnerships must be in accordance with IRS Reg §1.704-1(b)(3). The allocation of associated tax-exempt income must follow the allocations of deductions. In the event a deduction is capitalized, the tax-exempt income is allocated as if the capital expenditure was hypothetically disposed of for $0 consideration and allocated under §1.704-1(b)(3).

Treatment of deductions and tax-exempt income from other COVID-19 relief (Including but not limited to EIDL or Restaurant Revitalization Grants) must also be allocated in accordance with §1.704-1(b)(3).

Members of a consolidated group may treat loan forgiveness as tax-exempt income only if they attach a signed statement to its consolidated tax return, indicating all covered taxpayers are reporting consistently and relying on Section 5 of this Revenue Procedure.

Rev. Proc. 2021-50

The Bipartisan Budget Act of 2015 (BBA) provided a centralized audit regime for partnerships. Unless the IRS authorizes partnerships to amend partnerships under specific guidance, partnerships are generally unable to file amended tax returns. An exception is an election under §6221(b). This procedure is another, which allowed the IRS to carve out BBA partnerships an exception to filing amended returns.

BBA partnerships who wished to file amended returns could consider changes under Revenue Procedures 2021-48 or 2021-49. Additional corrections were allowed if changes from the aforementioned procedures are included. This Revenue procedure allowed amended BBA partnership returns as long as they were filed by December 31, 2021.

If a partner receiving an amended K-1 pursuant to this Rev Proc is also a partnership, they are permitted to file amended returns of their own, but only to the extent of changes from the lower tier K-1.

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