PPP Forgiveness and Basis
As discussed in our post on February 9, 2021, expenses paid with funds from the Paycheck Protection Program (PPP) are fully deductible, even though the loans were or will be forgiven. In addition, the adjusted basis of owners of entities with PPP loans will be increased by the tax-free income resulting from the forgiveness of PPP loans. Such entities include S corporations, partnerships and limited liability companies (LLCs) that are taxed as partnerships.
On November 18, 2021, the IRS has issued Revenue Procedure 2021-48 related to the timing of reporting tax-exempt income from PPP forgiveness, which affects when it will increase the basis of owners of pass-through entities.
Revenue Procedure 2021-48 indicates that taxpayers can recognize the tax-exempt income resulting from the forgiveness of PPP loans when they file the application for forgiveness or when the PPP forgiveness is granted. (Taxpayers who deduct expenses that were paid with PPP funds in the year after they paid the expenses, as discussed in the safe harbor set forth in Revenue Procedure 2021-20, are permitted to recognize the tax-exempt income in the same year the expenses are deducted.)
To the extent that a taxpayer filed the PPP application for forgiveness in 2020 but did not recognize tax-exempt income on the 2020 return, since the forgiveness did not occur until 2021, Revenue Procedure 2021-48 indicates that taxpayers can amend their 2020 returns to recognize the tax-exempt income from forgiveness on their 2020 returns. (Amending 2020 returns may allow some owners of pass-through entities to recognize more losses, if they were limited in the amount of losses they could otherwise recognize due to the adjusted basis loss limitation.)
Separately, the IRS also issued Revenue Procedure 2021-49, which provides additional guidance for reporting tax-exempt income for partnerships and consolidated groups that received PPP and similar relief programs, regarding allocation of the tax-exempt income and similar issues. In addition, the IRS issued Revenue Procedure 2021-50, which allows partnerships subject to the centralized partnership audit procedures to amend 2020 returns to reflect the new rules contained in these newly-issued revenue procedures, but such amendments must occur on or before December 31, 2021.
Are you enrolled in our Individual Tax Year-End Workshop this December or January? If you are not already registered, it’s time to enroll, so you’ll be fully prepared! Register here.