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Client Alert: IRS Provides Additional Direction on Tax Treatment of PPP Loan Forgiveness

Date: December 3, 2021
From the outset, the CARES Act provided that the forgiven amounts of Paycheck Protection Program (“PPP”) loans would not be includable in a PPP borrower’s gross income at the federal level, and subsequent legislation provided that expenses paid with PPP funds would still be tax deductible. On November 17, 2021, the Internal Revenue Service (“IRS”) issued three separate revenue procedures on the tax treatment of the forgiveness of PPP loans: Rev. Proc. 2021-48, Rev. Proc. 2021-49, and Rev. Proc. 2021-50.

Rev. Proc. 2021-48 addresses the timing of the receipt or accrual of the tax-exempt income arising from PPP loan forgiveness. This revenue procedure states that PPP borrowers may treat the tax-exempt income as received or accrued (1) as eligible expenses are paid or incurred; (2) when an application for the PPP loan forgiveness is filed; or (3) when the PPP loan forgiveness is granted. To the extent that tax-exempt income resulting from PPP loan forgiveness is treated as gross receipts for federal tax purposes, these provisions also apply to the timing and potential reporting of such gross receipts.

Rev. Proc. 2021-49 addresses (1) allocations of tax-exempt income stemming from the forgiveness of PPP loans for partners and partnerships; (2) allocations of deductions stemming from expenditures attributable to the use of forgiven PPP loans; (3) the adjustments that are to be made with respect to the tax basis of a partner in a partnership interest; and (4) the adjustments that are to be made with respect to the tax basis in stock of subsidiary members of consolidated groups resulting from tax-exempt income from forgiven PPP loans. According to the IRS:

This revenue procedure provides guidance for partners and their partnerships regarding allocations under § 704(b) of the Internal Revenue Code and the corresponding adjustments to be made with respect to the partners’ bases in their partnership interests under § 705 of the Code. This revenue procedure also provides guidance under § 1502 of the Code and § 1.1502-32 of the Income Tax Regulations regarding the corresponding basis adjustments for stock of subsidiary members of consolidated groups as a result of tax exempt income arising from certain forgiven PPP Loans, grant proceeds, or subsidized payment of certain principal, interest and fees.

Finally, Rev. Proc. 2021-50 allows eligible partnerships to file amended partnership returns for taxable years ending after March 27, 2020, as long as certain requirements in Rev. Proc. 2021-49 are met, and the amended partnership returns are filed prior to December 31, 2021. The opportunity granted by this revenue procedure to file amended partnership returns allows eligible partnerships to take advantage of Rev. Proc. 2021-48 and Rev. Proc. 2021-49 without filing an administrative adjustment request.

As you are making year-end tax planning decisions, you may consider discussing the impact of this IRS guidance with your tax advisors.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.