IRS Issues New Guidance on PPP Basis Adjustments

When the Consolidated Appropriations Act was passed in December of 2020, taxpayers across the nation were relieved to learn that not only would the forgiveness of Payroll Protection Program (PPP) loans be considered tax-exempt income, but that the expenses paid with those funds would also be deductible.  At the same time however, CPAs across the country had questions about the timing of the income and expenses, and how basis adjustments would be handled.  Since the receipt of loan funds and the forgiveness of the loans often spanned different tax periods, there were consequences from the possible timing mismatch of income and expenses.

With the IRS’s release of three new revenue procedures in November of 2021, some of these questions have been addressed.

Timing Issues

Rev. Proc. 2021-48 addresses the timing of the recognition of tax-exempt income arising from forgiveness of PPP loans.  Taxpayers are given the option of treating this income as received or accrued at any of the following times:

  • When expenses eligible for forgiveness are incurred or paid,
    • When an application for PPP loan forgiveness is filed, or
    • When PPP loan forgiveness is granted

Although the income from PPP loan forgiveness is excluded from gross income for tax purposes, it must be included in certain other calculations of gross receipts, and its specific timing should be considered.

Allocation Issues

Rev. Proc. 2021-49 provides guidance on how partnerships can allocate the deductions and tax-exempt income connected with PPP loan forgiveness and certain grant proceeds (such as Emergency Economic Injury Disaster Loan (EIDL) grants) as well as the corresponding adjustments to partners’ bases from this activity.

Amended Returns

Rev. Proc. 2021-50 allows for BBA partnerships to have the option to amend the returns for tax years ending after March 27, 2020 if they need to make changes based on the guidance issued in Rev. Proc. 2021-48 or 2021-49.  Generally, BBA Partnerships that wish to make partnership adjustments to a return are required to file an Administrative Adjustment Request (AAR).  However, if the adjustments are related to the timing or allocation of PPP loan items as described above, an amended 1065 may be filed instead, which is a far simpler and more streamlined process.  The deadline for filing such amended returns is December 31, 2021.

Updated information on the PPP loan program, EIDL grants, and other COVID-related tax programs is still being released even over a year past the start of the COVID pandemic.  Be sure to reach out to your CPA with any questions and to find out how the new guidance may impact your tax returns.

Allison Swanberg, CPA

Written by:

Allison Swanberg, CPA

Tax Senior

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