Takeaways

Taxpayers who have already filed Federal tax returns may amend their returns to incorporate IRS guidance regarding the timing and allocation of the tax-exempt income and deductions relating to PPP loans.
Taxpayers can treat income arising out of PPP loan forgiveness as accrued or received when eligible expenses are actually paid or accrued, when an application for forgiveness of a PPP loan is filed, or when PPP loan forgiveness is granted.
Partnerships must issue to each partner an amended Schedule K-1 and file amended partnership returns before or on December 31, 2021.

Under the CARES Act, cancellation of indebtedness income arising out of the forgiveness of a Paycheck Protection Program (PPP) loan (referred to as “tax-exempt income”) may be excluded from gross income up to the cost of eligible expenses. (For a discussion of what qualifies as an eligible expense and the reduction of eligible expenses, see our related blog post here.) The IRS has recently issued three revenue procedures addressing the treatment of this tax-exempt income and related adjustments.

Timing and Reporting of Income

Revenue Procedure 2021-48 discusses the timing and reporting of the receipt of PPP forgiveness tax-exempt income. Under this procedure, the taxpayer may treat PPP loan forgiveness tax-exempt income as received or accrued:

  • when eligible expenses are actually paid or accrued;
  • when an application for forgiveness of the PPP loan is filed; or
  • when PPP loan forgiveness is granted.

The procedure provides that a taxpayer may report any tax-exempt income on any original or amended Federal tax return, information return, or administrative adjustment request.

Certain taxpayers may have previously reported tax-exempt income. If such a taxpayer receives an amount of PPP loan forgiveness that is less than the amount the taxpayer previously treated as tax-exempt income, the taxpayer must amend the prior filings to correct the amount of tax-exempt income and make any related adjustments.

Partnerships and Partners (and Consolidated Groups)

Revenue Procedure 2021-49 provides guidance to partnerships on how to allocate tax-exempt income and deductions relating to the PPP loan. Under this procedure, tax-exempt income and deductions generally are allocated by a partnership to partners in accordance with the partners’ economic interests in the partnership. Each partner’s tax basis will be increased by the partner’s share of the tax-exempt income and decreased by the partner’s share of the deductions.

In addition to partnership allocations, the procedure provides guidance for corporations with respect to similar adjustments of stock basis by members of a consolidated group.

Amended Partnership Returns

Revenue Procedure 2021-50 provides eligible partnerships the option to file amended partnership returns using a Form 1065, and to issue an amended Schedule K-1 to each of its partners, in lieu of filing an administrative adjustment request (AAR) under Section 6227 of the Internal Revenue Code to take into account the guidance described above.

Eligible partnerships are those subject to the centralized partnership audit regime of the Bipartisan Budget Act of 2015 (BBA) which already filed returns and issued Schedule K-1s for taxable years ending after March 27, 2020, and prior to the issuance of Revenue Procedures 2021-48 and 2021-49. The partnership must clearly indicate the application of Revenue Procedure 2021-50 by writing “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. Amended returns must be filed, and each corresponding Schedule K-1 must be furnished, on or before December 31, 2021.

Partners and shareholders must amend their Federal income tax returns to be consistent with the amended Schedule K-1s received.

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