IRS Explains Treatment of Tax Items Affected by Paycheck Protection Program Loans

(Parker Tax Publishing November 2021)

The IRS issued procedures which (1) explain the tax treatment of tax-exempt income related to the forgiveness of Paycheck Protection Program (PPP) loans; (2) provide guidance for partnerships and consolidated groups regarding PPP and other COVID-19-related relief program amounts either excluded from gross income or allowed as deductions, and (3) allow eligible Bipartisan Budget Act of 2015 (BBA) partnerships to file amended Forms 1065 and furnish amended Schedules K-1 on or before December 31, 2021, in order to adopt the PPP guidance in the procedures if certain requirements are met. In order to take advantage of the option to amend partnership returns, such amended partnership returns must be filed, and corresponding Schedules K-1 must be furnished on or before December 31, 2021. Rev. Proc. 2021-48; Rev. Proc. 2021-49; Rev. Proc. 2021-50.

Background

In 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (Pub. L. 116-136) was passed in response to the coronavirus pandemic. Included in the CARES Act was a loan program titled the "Paycheck Protection Program" (PPP), which was subsequently enhanced at the end of 2020 in the Further Consolidated Appropriation Act, 2020 (Pub. L. 116-260), and then further extended and enhanced in the American Rescue Plan Act of 2021 (Pub. L. 117-2). Under the PPP Extension Act of 2021 (Pub. L. 117-6), the PPP program expired on May 31, 2021. The CARES Act program authorized the Small Business Administration (SBA) to guarantee billions in loans to eligible businesses and nonprofits affected by coronavirus/COVID-19. Such loans also qualify for tax-free loan forgiveness. Maximum loan amounts, subject to a $10 million limit, were set at 2.5 times the borrower's average monthly payroll costs (First Draw loans).

Subsequently, the Consolidated Appropriations Act, 2021 (CAA) created "PPP Second Draw" loans for smaller and harder-hit businesses, with a maximum loan amount of $2 million. PPP loan proceeds were required to be used for payroll costs, utility payments, rent, and interest on certain mortgages. Section 1109(b) of the CARES Act allows the Treasury Department, the Farm Credit Administration, and other federal financial regulatory agencies to authorize bank and nonbank lenders, including insured credit unions, to participate in loans made under the PPP and provide PPP loans under Section 1109 (Section 1109 loans). Under the CARES Act, regulations establishing the terms and conditions of Section 1109 loans must provide for forgiveness of Section 1109 loans under terms and conditions that, to the maximum extent practicable, are consistent with the terms and conditions for loan forgiveness of PPP First Draw loans.

Last week the IRS published three related revenue procedures - Rev. Proc. 2021-48, Rev. Proc. 2021-49, and Rev. Proc. 2021-50 - that deal with the tax treatment of PPP-related expenses and income and which allow eligible Bipartisan Budget Act (BBA) of 2015 partnerships to file amended Forms 1065 and furnish amended Schedules K-1 on or before December 31, 2021, to adopt the PPP guidance in these revenue procedures if certain requirements are met.

Practice Tip: In order to take advantage of the option to amend partnership returns, such amended partnership returns must be filed, and corresponding Schedules K-1 must be furnished, on or before December 31, 2021.

Rev. Proc. 2021-48

In Rev. Proc. 2021-48, the IRS provides that taxpayers may treat amounts that are excluded from gross income (tax-exempt income) in connection with the forgiveness of PPP loans as received or accrued: (1) as eligible expenses are paid or incurred, (2) when an application for PPP loan forgiveness is filed, or (3) when PPP loan forgiveness is granted. To the extent tax-exempt income resulting from the forgiveness of a PPP loan is treated as gross receipts under a particular federal tax provision, Rev. Proc. 2021-49 applies for purposes of determining the timing and, to the extent relevant, reporting of such gross receipts.

The IRS notes that Rev. Proc. 2021-20 provides a safe harbor which allows certain taxpayers that, under prior guidance issued by the IRS, did not deduct certain otherwise deductible PPP-related expenses on a tax return that was filed before the enactment of the CAA, to deduct such expenses in the next tax year (that is, the tax year following the tax year in which such expenses were paid or incurred).

Unless otherwise provided in the 2021 filing year form instructions, if the taxpayer receives forgiveness for an amount of its PPP loan that is less than the amount that the taxpayer previously treated as tax-exempt income, the taxpayer must make appropriate adjustments on an amended federal income tax return, information return or administrative adjustment request (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. Partners and shareholders that receive amended Forms K-1 must file amended federal income tax returns, information returns or AARs, as applicable, consistent with the Forms K-1 received.

Rev. Proc. 2021-49

Rev. Proc. 2021-49 provides guidance for partners and their partnerships and consolidated groups regarding amounts excluded from gross income (tax exempt income) and deductions relating to the PPP and certain other COVID-19 relief programs. Among other guidance, Rev. Proc. 2021-49 provides:

(1) guidance for partners and their partnerships regarding: (i) allocations under Code Sec. 704(b) of tax exempt income arising from the forgiveness of PPP loans, (ii) the receipt of certain grant proceeds, or (iii) the subsidized payment of certain principal, interest and fees;

(2) allocations under Code Sec. 704(b) of deductions resulting from expenditures attributable to the use of forgiven PPP loans or certain grant proceeds, or subsidized payments of certain interest and fees; and

(3) the corresponding adjustments to be made with respect to the partners' bases in their partnership interests under Code Sec. 705.

Rev. Proc. 2021-49 also provides guidance on the tax treatment of Economic Injury Disaster loans (EIDLs) and Shuttered Venue Operator Grants.

Rev. Proc. 2021-50

In Rev. Proc. 2021-50, the IRS provides that eligible Bipartisan Budget Act of 2015 (BBA) partnerships can file amended Forms 1065 and furnish amended Schedules K-1 on or before December 31, 2021, to adopt the guidance set forth in Rev. Proc. 2021-48 and Rev. Proc. 2021-49 if certain requirements are met.

Observation: The rules enacted in the BBA replaced the unified partnership audit and litigation rules enacted by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). Section 1101(c) of the BBA replaced the TEFRA partnership procedures with a centralized partnership audit regime that, in general, determines, assesses, and collects tax at the partnership level. The centralized partnership audit procedures enacted by the BBA are found at Code Sec. 6221 through Code Sec. 6241. The centralized partnership audit procedures apply to all partnerships, unless the partnership makes a valid election under Code Sec. 6221(b) not to have those procedures apply. Partnerships subject to the centralized partnership audit regime are referred to as "BBA partnerships."

Rev. Proc. 2021-50 explains how a BBA partnership that wishes to take advantage of Rev. Proc. 2021-48 or Rev. Proc. 2021-49 may do so without filing an AAR under Code Sec. 6227, which is the process prescribed for a partnership to make partnership adjustments to a partnership return after it is filed.

Under Rev. Proc. 2021-50, a BBA partnership has the option to file an amended return instead of an AAR, though it does not prevent a partnership from filing an AAR to obtain the benefits of Rev. Proc. 2021-48, Rev. Proc. 2021-49, or any other tax benefits to which the partnership is entitled. A BBA partnership that files an amended return pursuant to Rev. Proc. 2021-50 is still subject to the centralized partnership audit procedures enacted by the BBA.

For a discussion of the tax treatment of discharge of indebtedness relating to PPP loans and the safe harbor of Rev. Proc. 2021-20, see Parker Tax ¶72,340.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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