A cash basis taxpayer reports income as received and expenses as paid. An accrual basis taxpayer reports income as earned and expenses as incurred. Naturally this means the forgiveness of a PPP loan is forgiveness income (nontaxable per law) at the time it is forgiven based on the taxpayer’s method of accounting.
IRS Notice 2020-32, released in late April 2020 (a year and a half ago) said the expenses related to PPP loan proceeds were NOT deductible when paid/incurred because they “would result in the forgiveness” and owners’ bases in entities was NOT increased by the nontaxable PPP debt forgiveness. Both of these were changed on December 27, 2020, when the Consolidated Appropriations Act, 2021 was signed by President Trump. These expenses became retroactively deductible and partners and S corporation shareholders were retroactively allowed to increase their basis by the forgiven PPP loan.
Because of the original denial of expenses, many taxpayers paid/incurred additional expenses to help keep their income down. As a result of the retroactive deductibility of the expenses paid with the PPP loan proceeds, many of these taxpayers had losses for the year. In the case of partnership and S corporations, in many cases the losses exceeded the owner’s basis.
There have been questions on whether the forgiveness could be considered to have happen earlier, such as when the PPP qualifying expenses are paid/incurred.
Now IRS has released Revenue Procedures 2021-48, 2021-49, and 2021-50 dealing with this timing issue. The question is: When can a taxpayer treat the PPP loan as forgiven –
1) When the expenses are paid/incurred?
2) When the application for PPP loan forgiveness is filed?
3) When the PPP loan forgiveness actually takes place?
In Revenue Procedure 2021-48, IRS answers this question by saying, effectively, “YES”. Actually, IRS said the taxpayer can choose any of the above as long as it is consistent with the tax-exempt income resulting from the forgiveness of a PPP Loan being treated as gross receipts under a particular Federal tax provision, including but not limited to IRC §§448(c) and 6033. IN OTHER WORDS – CHOOSE WHICH OF THE THREE DATES THAT YOU WANT TO USE as long as it is shown as income on the books as of the same date.
The Revenue Procedure also states a partnership or S corporation (plus subsidiary members of consolidated groups) must make the decision of the timing of the PPP Loan forgiveness at the entity level. If the decision is to treat the forgiveness as if it happened in a prior year, the entity will file an amended return for the prior year. It appears this amended return can be filed at any time during the normal 3-year statute of limitations as long as the conditions above are met. (See below if the entity is a partnership subject to the BBA provisions.)
Revenue Procedure 2021-49 addresses the allocation of the PPP Loan forgiveness among the owners of a partnership or S corporation. Basically, the amount of forgiveness income to allocate to a partner or S corporation shareholder is tied to the PPP Loan related expenses that were allowed to that person.
Revenue Procedure 2021-50 addresses partnerships subject to the Bipartisan Budget Act of 2015 (BBA). Under §6227, a BBA partnership (a partnership subject to the consolidated audit procedures) is limited in its ability to file an amended tax return. BBA partnerships must generally file an Administrative Adjustment Request (AAR) under §6227 to make partnership adjustments AND is not allowed to amend its tax return after the due date of the return, UNLESS specifically provided by the Secretary of the Treasury or his/her delegate.
This Revenue Procedure exercises that authority to allow a BBA partnership to file an amended return and furnish Schedules K-1 for taxable years ending after March 27, 2020. The BBA partnership should file Form 1065 with the “Amended Return” box checked, “FILED PURSUANT TO REV PROC 2021-50” at the top of the amended return, and issuing amended Schedules K-1 to each owner, with this same “FILED PURSUANT…”. A partner that receives an amended Schedule K-1 must amend the partner’s return. A BBA PARTNERSHIP’S AMENDED RETURN MUST BE FILED NO LATER THAN DECEMBER 31, 2021. Otherwise, a BBA partnership is required to go through the AAR procedures, which can be used through the normal 3-year statute of limitations for the applicable tax year.
