The IRS recently released guidance (Rev. Proc. 2021-48 and Rev. Proc. 2021-49) on the timing of gross receipts and tax-exempt income from the forgiveness or partial forgiveness of Paycheck Protection Program (PPP) loans.
PPP loans were created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which provides for forgiveness if loans proceeds are used on eligible expenses. Taxpayers who received PPP loan forgiveness can also exclude those amounts from gross income, and do not need to reduce deductions for any expense paid for out of loan income. Although forgiven loans are not includible in gross income, such amounts are includible for purposes of gross receipts under some federal tax provisions. For example, the inclusion of forgiven PPP loans in gross receipts tests affects small business taxpayers eligible to use the cash method under Section 448(c), as well as filing requirement thresholds for tax-exempt organizations under Section 6033.
The lack of guidance regarding the timing left taxpayers uncertain of when to include forgiven amounts in gross receipts or when the loan principal coverts to tax-exempt income for basis and other purposes. Rev. Proc. 2021-48 provides taxpayers clarity regarding the timing of when the loan proceeds become tax-exempt income and are includible for gross receipts tests. Rev. Proc. 2021-49 provides guidance for partnership and consolidated groups regarding amounts excluded from gross income and specifically addresses allocations to basis.
Rev. Proc. 2021-48 provides that taxpayers who receive partial or complete forgiveness of a PPP loan may treat the resulting tax-exempt income as received or accrued: (1) as eligible expenses are paid or incurred; (2) when the taxpayer files an application for forgiveness of the PPP loan; or (3) when the PPP loan forgiveness is granted.
Rev. Proc. 2012-48 also addresses initial concerns that a lack of guidance would potentially pose a mismatch of income and expenses—as some entities may not have deducted expenses before a statutory change in the Tax Relief Act of 2020 reversed IRS guidance requiring taxpayers to reduce deductions for expenses paid with forgiven loan proceeds. A safe harbor is available for those who did not deduct otherwise deductible PPP eligible expenses on a tax return filed prior to the enactment of Tax Relief Act of 2020. Taxpayers will be treated as paying or incurring the eligible expenses in the taxpayer’s immediately subsequent taxable year.
Rev. Proc. 2021-48 instructs taxpayers to report tax-exempt income on a timely filed original or amended federal income tax return, information return or administrative adjustment request (AAR) under Section 6227. Additionally, eligible partnerships can file an amended Form 1065 and provide a corresponding amended Schedule K-1 instead of filing an AAR. Further details are provided in Rev. Proc. 2021-50.
Rev. Proc. 2021-49 provides guidance for partnership and consolidated groups regarding amounts excluded from gross income and specifically addresses allocations to basis. Notably, Rev. Proc. 2021-49 does not provide a specific method for a partnership to allocate deductions funded by a PPP loan to its partners, and instead requires that such deductions be allocated according to the partners’ overall interests in the partnership. Allocations of the tax-exempt income resulting from the forgiveness of a partnership’s PPP loan are made in the same manner.
Rev. Proc. 2021-48 is in effect for any taxable year in which a taxpayer paid or incurred eligible expenses described in the revenue procedure and any taxable year which the taxpayer applied for loan forgiveness or forgiveness was granted.
Grace Kim has more than 20 years of experience in the area of partnership taxation, which includes IRS, law firm and accounting firm positions. Her diversified experience includes working on a broad range of structuring and operational issues in a variety of industries and areas.
Washington DC, Washington DC
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