- Three recent revenue procedures regarding the timing of tax-exempt income from PPP loan forgiveness could affect your tax plan.
- The first provides alternatives for when tax-exempt income from PPP loan forgiveness can be treated as received or accrued.
- The second provides guidance to partnerships for allocating tax-exempt income and related expenses from PPP loan forgiveness.
- The third gives eligible BBA partnerships the option to amend a previously filed return to apply one of the above.
- Understand the nuances before amending your return.
Should you amend your tax return?
The IRS recently issued three revenue procedures (rev. proc.) providing guidance with respect to the timing of tax-exempt income from PPP loan forgiveness and from certain grant proceeds and subsidized payments of principal, interest, and fees.
Owners of partnerships and S corporations receive a basis increase for their share of the tax-exempt income. For taxpayers with insufficient basis or amounts at-risk, timing can impact the ability to deduct losses or to distribute funds to owners tax-free. The timing also affects the computation of average annual gross receipts for determining if the entity is a small taxpayer entitled to simplified accounting methods.
Rev. Proc. 2021-48
Rev. Proc. 2021-48 applies to first- and second-draw PPP loans and CARES Act Sec. 1109 loans (collectively, “PPP loans”). In connection with the forgiveness of PPP loans, Rev. Proc. 2021-48 provides three alternatives for when taxpayers can treat amounts excluded from gross income (i.e., tax-exempt income) as received or accrued:
- As expenses eligible for forgiveness are paid or incurred (the earliest increase)
- When an application for PPP loan forgiveness was filed
- When the PPP loan forgiveness was granted (the latest increase)
The first alternative treats the tax-exempt income as being received or accrued over a period of time, which might fall within more than one tax year. The other two alternatives treat the tax-exempt income as being received or accrued on a specific date.
Under the first alternative, a taxpayer who elects to use the safe harbor provided under Rev. Proc. 2021-20 is treated as paying or incurring the eligible expenses during the taxpayer’s immediately subsequent taxable year following the taxpayer’s 2020 taxable year in which the expenses were actually paid or incurred.
Tax-exempt income from PPP loan forgiveness may be reported on a timely filed original or amended income tax return or, in the case of a partnership, on an administrative adjustment request (AAR). In certain circumstances, Rev. Proc. 2021-50 provides an option for eligible partnerships to amend returns pursuant to the provisions of Rev. Proc. 2021-48 or Rev. Proc. 2021-49.
This revenue procedure also provides guidance for making appropriate adjustments on an amended return or AAR, as applicable, for the taxable year(s) in which a taxpayer treated tax-exempt income from the forgiveness of a PPP loan as received or accrued and subsequently received forgiveness of the PPP loan in a lesser amount.
Rev. Proc. 2021-49
Rev. Proc. 2021-49 provides that, for partnerships, the IRS will treat the allocations of partners’ distributive shares of the tax-exempt income and related expenditures as determined in accordance with Code Section 704(b) if the allocations are determined under Treasury Regulation 1.704-1(b)(3), according to the partners’ overall economic interests in the partnership.
This revenue procedure also provides guidance regarding stock basis adjustments for the tax-exempt income of subsidiary members of consolidated groups of C corporations, which is beyond the scope of this article.
Rev. Proc. 2021-50
Rev. Proc. 2021-50 provides an option for eligible partnerships to amend a previously filed tax return to take advantage of Rev. Proc. 2021-48 or Rev. Proc. 2021-49. This option is available to partnerships that:
- Are subject to the centralized partnership audit regime (CPAR) under the Bipartisan Budget Act of 2015 (BBA partnerships), and
- Filed Forms 1065 and furnished Schedules K-1 for the partnership taxable years ending after March 27, 2020, and prior to the issuance of Rev. Proc. 2021-48 or Rev. Proc. 2021-49.
BBA partnerships would ordinarily be required to file an AAR to make adjustments pursuant to Rev. Proc. 2021-48 or Rev. Proc. 2021-49. However, Rev. Proc. 2021-50 allows an amended return to be filed instead of using the AAR procedure.
To utilize the amended return option, the amended partnership tax return must be filed, and amended Schedules K-1 must be furnished to partners, on or before December 31, 2021. The amended partnership return and Schedules K-1 must also comply with additional reporting requirements specified in Section 4 of Rev. Proc. 2021-50.
A BBA partnership that amends a return under Rev. Proc. 2021-50 may make any potential additional changes, not related to these revenue procedures, on the amended return.
Rev. Proc. 2021-50 does not apply to eligible partnerships that elected out of the CPAR. Eligible partnerships that elected out of the CPAR may still file an amended partnership income tax return to include the tax-exempt income from PPP loan forgiveness under one of the three alternatives of Rev. Proc. 2021-48 if the tax-exempt income was not included in the original return.
Does it make sense to amend?
Generally, if tax basis or amounts at-risk are insufficient to allow partners or S corporation shareholders to deduct pass-through losses or receive tax-free distributions, earlier timing of tax-exempt income is likely beneficial. But take into consideration state income tax provisions for those states that treat PPP loan forgiveness as taxable.
The timing of the tax-exempt income may also affect the tax basis of a selling owner for purposes of determining gain or loss on the sale of a partnership interest or stock in an S corporation.
As with any tax planning opportunity, work with your tax advisor to review the specifics of your situation and determine which approach is a good fit for your organization.
How we can help
At CLA, we consider your particular circumstances to guide you through decisions and help you devise and implement a personalized tax plan that aligns with your objectives and available planning opportunities. We continuously monitor tax legislation and administrative guidance to help you understand significant developments and how they could affect you.