PPP Tax-exempt Income Timing and Basis Adjustment Guidance Issued
The IRS has released additional Paycheck Protection Program (PPP) loan forgiveness guidance. The guidance addresses (1) timing issues; (2) partner and consolidated group member basis adjustments; and (3) filing of amended partnership returns and information statements.
Timing of Tax-exempt Income
A taxpayer that received a PPP loan may treat tax-exempt income resulting from the partial or complete forgiveness of the PPP loan as received or accrued as follows:
- As the taxpayer pays or incurs eligible expenses. Under the safe harbor that allows certain taxpayers who relied on prior guidance and did not deduct certain PPP-related expenses on a tax return filed before the COVID Tax Relief Act was enacted, to deduct the expenses in the next tax year. A taxpayer that has elected to use the safe harbor will be treated as paying or incurring the eligible expenses during the taxpayer’s immediately subsequent tax year following the taxpayer’s 2020 tax year in which the expenses were actually paid or incurred, as described in Rev. Proc. 2021-20;
- When the taxpayer files an application for forgiveness of the PPP loan; or;
- When the PPP loan forgiveness is granted.
The timing treatment also applies to the extent tax-exempt income resulting from the partial or complete forgiveness of a PPP loan is treated as gross receipts under a federal tax provision.
If a taxpayer received PPP loan forgiveness of less than the amount that the taxpayer previously treated as tax-exempt income, the taxpayer must file an amended return, information return, or administrative adjustment request as applicable.
Partnership Allocations and Basis Adjustments
If covered partnerships meet certain requirements, the IRS will treat the covered taxpayer’s allocation of amounts treated as tax exempt income and allocation of deductions as determined in accordance with Code Sec. 704(b). A partner’s basis in its interest is increased by the partner’s distributive share of tax exempt income and is decreased by the partner’s distributive share of deductions. If certain conditions are met, the treatment generally applies in connection with:
- deductions and amounts treated as tax exempt income arising in connection with the forgiveness of a PPP loan;
- deductions and amounts treated as tax exempt income arising in connection with payments made by the SBA on behalf of the taxpayer with respect to a covered loan under § 1112(c) of the CARES Act; and
- the allocation of deductions and amounts treated as tax exempt income arising in connection with the taxpayer receiving a Supplemental Targeted EIDL Advance or a Restaurant Revitalization Grant.
Consolidated Group Members
For consolidated group members, the IRS will treat any amount excluded from gross income under § 7A(i) of the Small Business Act, § 276(b) of the COVID Tax Relief Act, or § 278(a)(1) of the COVID Tax Relief Act, as applicable, as tax exempt income for purposes of Reg. §1.1502-32(b)(2)(ii) investment adjustments. For the treatment to apply, the consolidated group must attach a signed statement to its consolidated tax return.
Eligible partnerships subject to the centralized partnership audit regime (BBA partnerships) that filed a Form 1065 and furnished all required Schedules K-1 for tax years ending after March 27, 2020 and before Rev. Proc. 2021-50 was issued may file amended partnership returns and furnish amended Schedules K-1 on or before December 31, 2021. The amended returns must take into account tax changes under Rev. Proc. 2021-48 or Rev. Proc. 2021-49, but eligible BBA partnerships may make any additional changes on their amended returns.
The amended return applies to any partnership tax year ending after March 27, 2020 and before the issuance of Rev. Proc. 2021-48 and Rev. Proc. 2021-49. The BBA partnership must clearly indicate the application of this revenue procedure on the amended return and write “FILED PURSUANT TO REV PROC 2021-50” at the top of the amended return and attach a statement with each amended Schedule K-1 furnished to its partners with the same notation.
Special rules apply to pass-through partners. A partnership under examination that wishes to use this amended return procedure must notify the revenue agent coordinating the partnership’s examination.