IRS Announces Changes to Recognition of PPP Forgiveness Income Rules

On November 18, 2021, the IRS issued three revenue procedures that modify the rules for timing of recognition of income related to forgiveness of PPP loans, as well as the timing for deduction of expenses associated with the PPP forgiveness. Special rules have also been provided to allow partnerships to file amended returns to incorporate these changes, where appropriate.

Rev. Proc. 2021-48 provides three distinct options for a taxpayer to choose when to report tax-exempt income resulting from the forgiveness of PPP loans. Taxpayers, whether using the cash or accrual basis, may report the forgiveness:

1. As and to the extent that they pay or incur expenses eligible to be paid with PPP funds (Note: if a taxpayer has elected to use the safe harbor method under Revenue Procedure 2021-20; they will be treated as paying or incurring the eligible expenses during the immediately subsequent taxable year following the taxpayer’s 2020 taxable year in which the expenses were actually paid or incurred);
2. When they file an application for forgiveness; or
3. When the PPP loan forgiveness is granted.

The Rev. Proc. 2021-48 also points out that while the forgiveness is treated as tax-exempt income, it is included as gross receipts for purposes of determining certain small business qualifications under Section 448 or for determining return filing requirements for tax-exempt organizations under Section 6033.

This procedure also applies to the timing of basis adjustments associated with both the forgiveness and deductions of eligible expenses.

If the amount of a PPP loan that is actually forgiven is less than the amount that a taxpayer previously treated as tax-exempt income, the taxpayer must make appropriate adjustments on an amended income tax return, information return, or Administrative Adjustment Request (AAR).

Rev. Proc. 2021-49 provides for rules for allocation of deductions of expenses incurred with loans and grants covered by the PPP and other COVID-19 relief programs and the related tax-exempt income for partnerships and consolidated groups.

The rule provides that, for partnerships, all items of deduction of eligible expenses and tax-exempt forgiveness income must be allocated in the same proportion as other income and expense items of the entity. No special allocation of these items is permitted. The same applies to allocation of basis adjustments associated with these items.

Partnerships that have PPP loan forgiveness and eligible expenses must report to the IRS all partnership items that the IRS requires to be reported in forms, instructions, or other guidance.

If a taxpayer that has PPP loan forgiveness and eligible expenses is a member of a consolidated group, the IRS will treat any amount excluded from gross income as tax-exempt income for purposes of computing the basis of stock in a subsidiary only if a signed statement is attached to the consolidated tax returns indicating that all taxpayers in the group are relying on Section 5 of this revenue procedure and reporting consistently.

Rev. Proc. 2021-50 provides rules for partnerships dealing with potential changes to returns caused by these new procedures that may have already been filed. Under BBA partnership rules, all partnerships, unless they have elected out, are prohibited from filing amended income tax returns. In lieu of amended returns, the BBA partnership rules provide for Administrative Adjustment Reports to simplify the adjustment procedure.

The Rev. Proc. 2021-50 will allow any BBA partnership that is impacted by these procedures to file amended returns for any year that ends after March 27, 2020 and before November 18, 2021. However, these amended returns must be filed (and amended Schedules K-1 be provided to partners) no later than December 31, 2021. Partnerships that are also partners in these BBA partnerships are not subject to the December 31, 2021 deadline.

Please reach out to your Citrin Cooperman advisor if you have any questions.