By Tom Ochsenschlager, J.D., CPA
Rev. Proc. 2021-48 and Rev. Proc. 2021-49 provide guidance regarding the tax effects of loans forgiven under the Paycheck Protection Program (PPP). In accordance with the Coronavirus Aid, Relief and Economic Security Act (CARES Act) the amount of the loans forgiven for tax purposes does not have to be included in gross income and the expenses covered by the forgiven loans can be deducted. However, the forgiven amounts are included in gross income to determine thresholds such as whether a small business can use the cash method of accounting and filing requirements under Section 6033 for a tax-exempt entity.
Rev. Proc. 2021-48 clarifies the following:
Taxpayers have the option of deducting the expenditures that were covered by the forgiveness of PPP loans:
- when the expense was incurred,
- when the taxpayer files the application for forgiveness, or
- when the forgiveness is granted.
Initially, the CARES Act did not permit deductions for expenses incurred by PPP loan forgiveness. The Tax Relief Act of 2020 retroactively reversed that position, and this Rev. Proc. permits taxpayers who filed their return prior to the Tax Relief Act to claim the deduction in the first year after the passage of the Tax Relief Act or file an amended return.
Although the PPP loans that are forgiven are not taxable income, the forgiven amounts must be reported on a timely filed or amended return or using an administrative adjustment request under Section 6227.
Rev. Proc. 2021-49 provides instructions for how partnerships allocate the PPP loan forgiveness and the expenditures covered by the PPP loan among the partners to determine each partner’s income or loss and basis.
Similarly, for consolidated groups, the Rev. Proc. also addresses the allocation of the expenditures attributable to a PPP loan and the appropriate basis adjustment for each of the group’s members.
It should be noted that, for S corporations, the draft of the 2021 S corporation return specifies that expenses paid with PPP loan proceeds reduce the Accumulated Adjustments Account on Schedule M-2 of the Form 1120S return.