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Guidance on PPP Loan Forgiveness

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.  

IRS Rev. Proc. 2021-48

IRS Rev. Proc. 2021-49

Rev. Procs. 2021-48, 2021-49, 2021-50: Tax treatment of PPP loan forgiveness; partnership allocations and stock basis adjustments (assets.kpmg)

Tax Section Odyssey: To amend or not to amend — that is not the only question (libsyn.com)

Comments

Patty Wyatt

Thank you for your inquiry, Shirley. The author provided this information from an SBA Notice:

SBA Notice, CONTROL NO.: 5000-20087

SUBJECT: Updated Information on IRS Information Reporting Relating to the Payments Made on Behalf of Borrowers under Section 1112 of the CARES Act Based on Section 278 of the COVID-related Tax Relief Act of 2020.

Reporting Interest Paid by Section 1112 Payments on Form 1098

Section 278(c)(2) of the COVID-related Tax Relief Act of 2020 provides that “no deduction shall be denied by reason of the exclusion [of the Section 1112 payments] from gross income.” Including the amount of interest paid on the loan by the Section 1112 payments on the Form 1098, Mortgage Interest Statement, furnished to small businesses will inform those businesses of the amount of Section 1112 mortgage interest they may deduct. In addition, including the amount of interest paid on the loan by the Section 1112 payments on the Form 1098 filed with the IRS will avoid discrepancies between interest reported to the IRS and interest claimed for deduction by small businesses.

Shirley Grigsby

Is the accrued interest paid by the SBA treated in the same manner as the principal? Since it is properly accrued for book purposes, yet never paid by the taxpayer (unlike the business expenses), should it be reversed rather than deemed forgiven?

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