Tax-exempt income timing of PPP loan forgiveness comes with options.
On Nov. 18, 2021, the IRS released three Rev. Procs. (Rev. Procs. 2021-48, 2021-49 and 2021-50) to address the treatment of tax-exempt income in connection with the forgiveness of Paycheck Protection Program (PPP) loans.
Rev. Proc. 2021-48
Rev. Proc. 2021-48 provides guidance on the appropriate timing for a PPP borrower to take tax-exempt income into account. Taxpayers may treat such income as received or accrued when either:
(1) Expenses eligible for forgiveness are paid or incurred,
(2) An application for PPP loan forgiveness is filed, or
(3) PPP loan forgiveness is granted.
The Rev. Proc. outlines that a taxpayer that reports tax-exempt income under one of these three methods can do so on a timely filed original or amended Federal income tax return, information return or a BBA partnership administrative adjustment request (AAR). If the PPP loan is partially forgiven, a taxpayer must make adjustments on an amended return, information return or AAR, as applicable, for the tax year(s) in which the taxpayer treated tax-exempt income from the forgiveness of such PPP loan as received or accrued.
While tax-exempt income from PPP loan forgiveness is excluded from taxpayers’ gross income, it must be included in gross receipts under section 448(c) for a small business taxpayer and under section 6033 for tax-exempt organizations. However, see Rev. Proc. 2021-33, which permits a taxpayer to exclude PPP loan forgiveness, shuttered venue operator grants and restaurant revitalization grants from the computation of gross receipts for employee retention credit purposes.
This Rev. Proc. is effective for any taxable year in which a taxpayer paid or incurred eligible expenses, any taxable year in which a taxpayer applied for forgiveness of a PPP Loan, or any taxable year in which the taxpayer’s PPP Loan forgiveness is granted.
Some taxpayers (generally fiscal year taxpayers) may have followed Rev. Proc. 2021-20, which provides a safe harbor to allow certain taxpayers that did not deduct PPP expenses on a tax return filed before the enactment the COVID Tax Relief Act. These taxpayers could deduct PPP expenses in the year subsequent to that filing year due to the change in law allowing PPP expenses to be deductible. If the taxpayer followed that safe harbor, such taxpayer will be treated as paying or incurring eligible expenses in the year subsequent to the taxpayer’s 2020 taxable year.
Rev. Proc. 2021-49
Rev. Proc. 2021-49 provides, in part, guidance on how partnerships may allocate deductions, and tax-exempt income, in connection with the forgiveness of a PPP Loan. The Rev. Proc. provides that partnerships may allocate the expenses in any matter that is in accordance with the partners’ interests in the partnership (as defined in Reg. section 1.704-1(b)(3)). Notably, this implies that the substantial economic effect safe harbor generally applicable to partnership allocations does not apply here, although such allocations may nevertheless be consistent with the partners’ interest in the partnership. Special rules are provided if an expenditure results in capitalized basis, instead of a deductible expenditure.
The Rev. Proc. clearly provides that the allocation of the tax-exempt income resulting from the forgiveness of a PPP Loan follows the allocation of the qualifying expenditures giving rise to the forgiveness—that is to say, it is based on the rules described above.
In addition to providing for partnership allocations, Rev. Proc. 2021-49 also provides for special rules relating to stock basis within consolidated corporate groups.
Rev. Proc. 2021-50
Rev. Proc. 2021-50 allows eligible Bipartisan Budget Act of 2015 (BBA) partnerships to file amended Forms 1065 and issue amended Schedule K-1s to partners, as an alternative to filing the AAR which would otherwise be required, on or before Dec. 31, 2021 to adopt the guidance that is set out in Rev. Procs. 2021-48 and 2021-49, if certain requirements are met.
The BBA partnership must indicate the application of this Rev. Proc. on the amended return and write “FILED PURSUANT TO REV PROC 2021-50” at the top of the amended return and attach a statement with each amended Schedule K-1 furnished to its partners with the same notation. The BBA partnership may file the amended return electronically (for faster processing) or by mail. Additionally, the BBA partnership filing an amended return pursuant to this Rev. Proc. should not include any forms that are normally only filed with an AAR, such as Form 8985 or Form 8986.
For a BBA partnership wishing to file an amended return under this Rev. Proc. and currently under exam can do so if the partnership sends notice in writing to the revenue agent coordinating the partnership’s examination that the partnership seeks to use the amended return option prior to or contemporaneously with filing the amended return. The partnership must also provide the revenue agent with a copy of the amended return and amended Schedules K-1 upon filing.
If a BBA partnership has previously filed an AAR and wishes to file an amended return pursuant to this Rev. Proc. for the same taxable year, the partnership should use the items as adjusted in the AAR, where applicable, in lieu of any reporting from the originally filed partnership return.
If a pass-through partner that is also a BBA partnership receives an amended Schedule K-1 issued pursuant to this Rev, Proc., the pass-through partner may file an amended return in lieu of filing an AAR, but only with respect to the items included on the amended Schedule K-1 it receives.
In addition to administrative ease, there are substantive reasons that a partnership may wish to file a traditional amended return, in lieu of filing an AAR. If refunds would result, for example from partners receiving favorable basis adjustments due to acceleration of the tax-exempt income, then filing an amended return could allow partners to receive those refunds sooner. In a more extreme case, there are certain situations in which the benefit of favorable adjustments resulting from an AAR may be nonrefundable.
The options provided in this Rev. Proc. apply to any partnership taxable year ending after March 27, 2020 and prior to the issuance of Rev. Procs. 2021-48 and Rev. Proc. 2021-49.