No. Loan proceeds received under the Paycheck Protection Program (PPP) are not taxable income, regardless if the loan was forgiven or not. Forgiven PPP loans are not considered cancellation of debt income, and as such, you should not report these loan proceeds on your tax return.
- If you think the PPP loan will be forgiven, then you won’t report it as taxable income in TurboTax. You would report it on line 16(a) as Other Tax-Exempt Income if you are filing a form 1120-S. It would appear on your financial statement as either loan payable or other income, so there may be a reconciliation issue if you report your balance sheet on your tax return.
How do I treat PPP loan forgiveness on my taxes?
The generosity of Congress extended to tax treatment, by providing in the Consolidated Appropriations Act of 2021 that the forgiveness of the PPP loans did not constitute taxable income and that the expenses paid with the borrowed monies would still be tax-deductible.
Where do I enter PPP forgiveness on tax return?
To enter PPP expenses for Schedule C, Schedule E, or Schedule F:
- Select the Income Statement section along the top of the input.
- Scroll down to the Expenses section.
- Enter expenses as you normally would – including any that were paid with PPP funds.
Is PPP loan forgiveness considered income?
For California purposes, forgiven PPP loans are excluded from gross income.
Is PPP loan reported on tax return?
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.
Does PPP loan forgiveness increase tax basis?
Loan forgiveness increases tax basis, at least in the context of pass-through entities (partnerships and S corporations where taxes are paid at the individual level, not the entity level). The tax basis in the business doesn’t increase until 2021 (the year of forgiveness) while the PPP expenses are deductible in 2020.
How do I report a PPP loan on TurboTax?
If you think the PPP loan will be forgiven, then you won’t report it as taxable income in TurboTax. You would report it on line 16(a) of Schedule K as Other Tax-Exempt Income if you are filing a form 1120-S.
What is the journal entry for PPP loan forgiveness?
Therefore, when the loan is legally forgiven by the lender, the accounting entry would be a debit to a long-term liability account (i.e., “PPP Loan Liability”) and a credit to income.
How do I record PPP loan forgiveness on S Corp tax return?
PPP loan forgiveness is included as book income
- On the Schedule M-1 as income on books not on return.
- For an S Corporation, the amount is treated as other exempt income.
- On Schedule K, line 16b.
- On Schedule K-1, Box 16B.
- On the Shareholder’s Basis Worksheet, Page 1, Line 7.
Is self employed PPP taxable?
However, there is some good news for self-employed individuals who are taxed on business profit. The forgiven amount of the PPP loan is not subject to income tax (or technically a reduction of costs eligible to be expensed for tax purposes) as it was never claimed as a business expense.
How to enter forgiven PPP loans for individual returns
This article will guide you through the process of reporting debt forgiveness under the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) advances on individual tax returns. Because these loans and grants are not taxable for federal income tax reasons, you will not normally include them as income on federal tax forms such as Schedule C, Schedule E, or Schedule F. Instead, you will include them as expenses on these forms. However, depending on the money received and the purpose for which they were spent, you may be required to make state adjustments to your income or expenses.
- Generally speaking, income from forgiven PPP loans and EIDL grants is not taxed at the federal level. Advertisement and office expenditures, for example, are still deductible for federal income tax reasons even if they were paid with a public-private partnership loan. Some states do not adhere to one or both of these rules
- However, others do.
To generate a PPP forgiveness statement:
- Select General from the drop-down option on the left. Select theMiscellaneous Information/Direct Deposit option from the drop-down menu. Make a selection from theMiscellaneoussection at the top of the input
- Make sure to fill out all of the required fields in the PPP Loan Forgiveness Statementsection.
The application will create a Rev. Proc. 2021-48 statement, which you may see on the Check Returntab, which is located under theStatements tab. This statement will be included in the federal return that has been e-filed.
To enter PPP expenses for Schedule C, Schedule E, or Schedule F:
Continue with the procedures below when you have selected the appropriate input screen (Business Income, Rental and Royalty Income, or Farm Income).
- Identify the Income Statementsection at the top of the input form. Scroll all the way down to the Expenses section. You should enter costs in the same way that you would normally do so, including those that were paid using PPP funding. Look for a space entitled Expenses nondeductible to indicate that pertains to a forgiven Paycheck Protection Program loan at the bottom of the Expensessection of the Form 1040. A state on the return will only be required to fill out this area if it has provided guidance declaring that they do not completely comply with federal requirements. Enter the amount of Expenses that are not deductible by the state because of a forgiven Paycheck Protection Program loan that you want to claim. It will lower the amount of deductible costs the firm may claim on its state tax return.
There is no requirement to include deductible costs that were paid with a forgiven PPP loan when there are no nonconforming states on a return if there are no nonconforming states. Because the loan has been forgiven, it is not considered taxable income, and the expenses that were paid with it are still deductible for federal income tax reasons. Observe: Additional state inputs for nonconformity from the IRC may be obtained on the Screens for StateLocal Modifications and Screens for Global Modifications.
To enter EIDL grants for Schedule C, Schedule E, or Schedule F:
If your return does not contain any nonconforming states, you do not need to include the amount of the EIDL advance (grant) that you got. The award is not considered taxable income for federal income tax purposes. It is only necessary to use the choices listed below to include the EIDL amount as income on a state tax return when it is needed.
- SelectStateLocal from the left-side menu, and then click on Modifications to see the changes. Select the state’s modification screen from the drop-down menu. The inputs that are accessible will differ depending on the state tax return
For K-1 recipients:
For federal tax reasons, forgiven PPP loans are classified “Other Tax Exempt Income,” and will be recorded on Schedule K-1 box 16B (S-corporations) or 18B (C-corporations) (partnerships). The shareholder’s or partner’s basis is increased by the amount of the dividend. Passthrough K-1s require you to enter the numbers on the screen exactly as they were reported on your client’s K-1. A base increase for the activity will be created automatically when entries are made in Other tax exempt income (line 16 for S-corporations and line 18 for partnerships).
- Select thePartnership Info (1065 K-1) input screen from the menu bar. Select the area labeled Lines 11-20 from the drop-down menu at the top of the input box. In the Line 18section, insert the amount from line 18B.
For S-corporations, the following rules apply:
- Navigate to the S-Corp Info (1120S K-1)input screen and fill out the necessary information. Select the area labeled Lines 11-17 from the drop-down menu at the top of the input box. In the Line 16section, insert the amount from line 16B.
If there are any differences owing to state nonconformity that were reported to you on the state K-1, be sure to utilize theState, if differentcolumn to record such discrepancies.
- Using California PPP and EIDL conformance to your advantage ProConnect Tax: How to input PPP loans and EIDL grants in the system
- COVID-19 disaster relief: Learn how to make modifications to your tax returns in ProConnect Tax.
Further guidance issued on tax treatment of PPP loan forgiveness
Revenue Procedures 2021-50, 2021-48, and 2021-49, issued on Thursday, provide advice on the handling of payments excluded from a taxpayer’s gross income in connection with the forgiveness of Paycheck Protection Program (PPP) loans, which were previously excluded from gross income. In a letter to the Internal Revenue Service dated March 15, 2021, the AICPA requested advice. Even though tax-exempt income resulting from PPP loan forgiveness is excluded from taxpayers’ gross income, tax-exempt income resulting from PPP loan forgiveness must be included in gross receipts for certain other purposes, including the gross receipts test under Section 448(c) for a “small business taxpayer” eligible to use the cash method of accounting and several other generally favorable tax accounting provisions.
Another example of this is the addition of specific return filing requirement thresholds for tax-exempt organizations under Section 6033 of the Internal Revenue Code.
114-74 (BBA partner audit procedures) should allocate PPP loan forgiveness as
Rev. Proc. 2021-48: Timing issues
Rev. Proc. 2021-48 addresses the timing of the receipt of PPP forgiveness revenue that is free from taxation. When one or more of the following events occurs: (1) costs eligible for forgiveness are paid or incurred; (2) an application for PPP loan forgiveness is filed; or (3) PPP loan forgiveness is approved, the income is treated as received or accumulated. When a PPP loan is only partially forgiven, the revenue procedure describes the adjustments that must be made on an amended return, an information return, or, in the case of certain partnerships, an administrative adjustment request, as well as the adjustments that must be made on an information return.
Rev. Proc. 2021-49: Allocation issues
Partnerships and individuals must follow the procedures outlined in Rev. Proc. 2021-49 to allocate among partners their distributive share of tax-exempt income and deductions resulting from expenditures attributable to the use of forgiven PPP loans under Sec. 704(b), as well as make corresponding adjustments to the partners’ bases in their partnership interests under Sec. 705. For corporations, the revenue method gives advice on how to make equivalent adjustments to stock basis by subsidiary members of consolidated groups under Section 1502 and Regulations Section 1.1502-32 of the Internal Revenue Code.
Rev. Proc. 2021-50: Amended returns
For tax years ending after March 27, 2020, Rev. Proc. 2021-50 permits qualifying BBA partnerships to file and issue updated Forms 1065 and amended Schedules K-1 for the purposes of the above-mentioned exemptions. On or by December 31, 2021, the updated returns and Schedules K-1 must be submitted or provided. Rev. Procs. 2021-48 and 2021-49 are applicable to BBA partnerships that have filed Forms 1065 and furnished Schedules K-1 for the partnership tax year ending after March 27, 2020, and before the issuance of Rev.
2021-48 and 2021-49 and have met certain other requirements listed in these revenue procedures.
New IRS Guidance on PPP Loan Forgiveness Tax Treatment
Because of a change of heart, the Internal Revenue Service (IRS) has issued three revenue procedures that provide taxpayers with greater flexibility in determining when they can realize tax-exempt income arising from their forgiven Paycheck Protection Program (“PPP”) loans. In connection with the entire or partial forgiveness of PPP loans, Revenue Procedure (Rev. Proc.) 2021-48 provides taxpayers with three alternatives for reporting sums that are excluded from gross income (tax-exempt income) and are not included in gross income.
- Payment or incurring of qualifying expenditures
- The filing of an application for PPP Loan forgiveness
- Or the awarding of PPP Loan forgiveness
Business taxpayers and their owners have already submitted their income tax returns for the year 2020, according to a recent survey. If taxpayers pick an option under Rev Proc 2021-48 that differs from the option they used to file their 2020 returns, it is possible that revised returns may need to be filed. Regulation 2021-49 offers guidance to partnerships and consolidated groups on tax-exempt income and deductions related to PPP and certain other COVID-19 relief programs, including the Partnership Tax Exemption Program (PPP).
More specifically, there is assistance for partners and their relationships in the following areas:
- Allotments under Section 704(b) of the Internal Revenue Code of tax-exempt income resulting from the forgiveness of PPP loans or the receipt of certain grant proceeds, or the subsidized payment of certain principal, interest, and fees
- Allocations under Section 704(b) of deductions resulting from expenditures attributable to the use of forgiven PPP loans or certain grant proceeds, or the subsidized payment of certain interest and fees
- And the corresponding adjustments to be made under Section 704.
In addition, this revenue procedure provides guidance under Section 1502 and Treasury Regulation 1.1502-32 regarding the corresponding basis adjustments for stock of subsidiary members of consolidated groups as a result of tax-exempt income arising from certain forgiven PPP Loans, grant proceeds, or subsidized payment of certain principal, interest, and fees, as well as the corresponding basis adjustments for stock of consolidated groups.
Proc. 2021-50, Rev. Proc. 2021-50 enables partnerships subject to the centralized partnership audit framework established by the Bipartisan Budget Act of 2015 (“BBA”) that wish to amend their recognition of PPP Loan forgiveness to do so with greater simplicity administratively.
Return of Partnership Income(Form 1065), with the “Amended Return” box checked, and issue amended Schedule K-1,Partner’s Share of Income, Deductions, Credits, and Other Expenses (Partner’s Share of Income, Deductions, Credits, It is not necessary to file an administrative adjustment request in order to make such a modification; instead, this updated return filing will suffice instead.
If you have any queries about PPP loans in general, please get in touch with our PPP loan counseling team.
IRS Issues Guidance on Reporting of Tax-Exempt Income under PPP
There are three Revenue Procedures issued by the Internal Revenue Service that explain how taxpayers can account for tax-exempt cancellation of indebtedness revenue flowing from forgiven Paycheck Protection Program loans in their Federal tax returns. TAKEAWAYS
- When qualified costs are paid or accumulated, when an application for forgiveness of a PPP loan is filed, and when PPP loan forgiveness is granted, taxpayers can regard income flowing from PPP loan forgiveness as accrued or received.
- Partnerships must submit modified Schedule K-1s to each partner and file amended partnership returns by or on December 31, 2021, whichever comes first.
- By December 31, 2021, partnerships must issue modified Schedule K-1s to each partner, as well as file amended partnership returns with the IRS.
Partnerships must send modified Schedule K-1s to each partner and file amended partnership returns by or on December 31, 2021, whichever is later.
- When qualified costs are actually paid or incurred
- When an application for forgiveness of the PPP loan is filed
- Or when forgiveness of the PPP loan is approved.
According to the protocol, a taxpayer may include any tax-exempt income on any original or modified Federal tax return, information return, or administrative adjustment request, regardless of whether the income is taxable. Certain taxpayers may have previously reported income that was exempt from taxation. A taxpayer who receives PPP loan forgiveness in an amount that is less than the amount of tax-exempt income that the taxpayer previously reported on his or her tax returns must amend his or her prior tax returns to correct the amount of tax-exempt income and make any related adjustments, as applicable.
Under this approach, a partnership’s tax-exempt income and deductions are normally shared among its partners in accordance with the partners’ economic interests in the partnership.
In addition to partnership allocations, the method provides advice for corporations in the event that members of a consolidated group make comparable modifications to their stock basis in the same manner.
Entitlement to the centralized partnership audit regime established by the Bipartisan Budget Act of 2015 (BBA) includes partnerships that have filed returns or issued Schedule K-1s for taxable years ending after March 27, 2020, but before the effective date of Revenue Procedures 2021-48 and 2021-49.
Amendments to returns must be submitted on or before December 31, 2021, and each related Schedule K-1 must be provided on or before that date.
Partners and shareholders are responsible for amending their federal income tax returns to ensure that they are compatible with the modified Schedule K-1s that they have received.
Paycheck Protection Program
No. If you receive loan profits under the Paycheck Protection Program (PPP), the proceeds are not taxable, regardless of whether the loan was forgiven or not. As a result, forgiven PPP loans are not considered cancellation of debt income, and as a result, you should not report the loan proceeds on your federal income tax return. Regardless of whether your company is a sole proprietorship, single-member LLC, partnership, multi-member LLC, corporation, or any other kind of business organization, this applies to you as a taxpayer.
- The Internal Revenue Service does not need or request this information on tax returns.
- The Consolidated Appropriations Act of 2021, which was passed by Congress, makes it plain that these costs are tax deductible.
- Following the enactment of the Consolidated Appropriations Act of 2021, the Internal Revenue Service released Revenue Ruling 2021-2, which rendered previous determinations that these costs were not deductible outdated.
- Not only do taxpayers receive tax-free treatment for the forgiven PPP loan profits, but they are also permitted to deduct costs incurred as a result of the loan forgiveness.
- You should record your costs in the TaxAct application the same way you would typically do so.
- If you are required to prepare Schedule L – Balance Sheet per Books, you can include the balance of your PPP loan on the balance sheet if it is applicable.
- In accordance with how your company defines the loan, the loan balance might be recorded as a nonrecourse loan, or it could be reported as a mortgage, note, or bond that is due in one year or more.
- The loan sum on Schedule L may not be required to be reported if your PPP loan was received and forgiven in the same tax year, in which case it may not be required to be reported.
You would need to recognize a book-tax difference on Schedule M-1 – Reconciliation of Income (Loss) per Books with Income (Loss) per Return, if you are also required to file that schedule, because forgiven PPP loan proceeds are not considered taxable income on your Federal return when filing your return.
Have a Forgiven Paycheck Protection Program (PPP) Loan? Understand The Tax Rules for PPP Loan Forgiveness
A popular adage holds that there is no exception to the rule that every rule has an exception, and this is true. Consider the implications of this. It is a standard tax law for debt forgiveness that the amount of debt forgiven is liable to federal income tax on the amount of debt forgiven. In this case, debt forgiveness under a public-private partnership (PPP) is an exception, albeit it wasn’t always that way from a tax standpoint. The CARES Act created public-private partnership (PPP) loans and provided that the amount of the PPP loan forgiven would be recognized as tax-exempt income on the borrowers’ federal tax returns under certain circumstances.
The regulations were updated to allow for these deductions, which completely transformed the situation.
As a result, approximately half of borrowers have not yet applied for loan forgiveness, and a tiny but considerable proportion have been obliged to repay a portion of their debt.
Impact of PPP Loan Forgiveness on Deducting Eligible PPP Expenses
Initially, the Internal Revenue Service prohibited deductions for costs incurred in connection with the establishment of PPP loan forgiveness. The CCA also modified the way in which these costs were treated for tax purposes. Those costs were explicitly deemed deductible under the law. Revenue Ruling 2021-2, which is effective for tax years ending after March 27, 2020, permits PPP borrowers to deduct costs that would normally be deductible if the expenses result in the forgiveness of a PPP debt, or are likely to result in the forgiveness of a PPP loan.
Forgiveness of debt will not result in any deduction being denied, no tax attribute being reduced, and no basis increase being denied.
As long as certain standards are followed, these borrowers will be able to deduct these costs on their 2021 tax returns, rather than having to file revised returns in 2020.
Timing Considerations: Basis and At-Risk Limitations
Loan forgiveness, at least in the context of pass-through enterprises, results in an increase in tax base (partnerships and S corporations where taxes are paid at the individual level, not the entity level). The deduction for ordinarily deductible costs paid from PPP loan proceeds may be limited for certain businesses based on the borrower’s tax basis or the amount at risk. Everything is dependent on the time. Consider the case of a partner or S corporation borrower who has incurred high PPP costs but has a low tax base in the company.
- The loan, on the other hand, was not forgiven until 2021.
- It is not until 2021 (the year of forgiveness) that the tax base in the firm increases, although the PPP costs are deductible beginning in 2020.
- It may necessitate a lengthy and difficult investigation.
- If you have a minor basis in a pass-through corporation on a regular basis, it is crucial to look at the tax year in which the PPP debt forgiveness was granted as well as the permissible deductions.
When will the forgiveness be treated as tax-exempt income for the purposes of computing tax basis in the property? And when will the costs be eligible for tax deductions? This problem of time may also have an influence on the acquisition or sale of the partnership or S company in question.
Impact of Loan Forgiveness on Federal Taxes
The amount of debt forgiveness received under a PPP is not included in taxable income. The following is also the tax treatment of forgiven, ordinarily deductible costs incurred within the covered period, as explained further: PPP borrowers can deduct qualified costs to the extent that those expenses were paid from the proceeds of the loan that was later forgiven by the PPP lender. Borrowers who have had their PPP debts forgiven are able to take advantage of the payroll tax deferral. They are not obligated to wait until after the day on which the debt was forgiven before filing a lawsuit.
When establishing the amount of employee retention credit as well as the amount of PPP forgiveness, however, they are not permitted to use the same pay data.
Impact of Loan Forgiveness on State and Local Taxes
It is possible that debt forgiveness under a public-private partnership (PPP) will result in taxable income under state and municipal tax laws. However, an increasing number of jurisdictions have determined that they would follow the federal treatment of PPP debt cancellation and will not apply the forgiveness to state income tax in order to comply with the federal handling of the loan forgiveness. Taxes in the State of Washington The impact of federal COVID-19 initiatives, including debt forgiveness for public-private partnerships (PPPs), on state and local taxation in Washington has been settled.
Small enterprises and non-profit organizations who obtained a federal Paycheck Protection Program (PPP) loan and/or an Economic Injury Disaster Loan (EIDL) advance are included in this category.
The Department of Revenue also highlighted their approach to dealing with the ambiguity that has resulted: The government feels that there may be a vested interest in clarifying the applicable legislation, particularly once the numerous programs at issue have been identified and properly evaluated.
No penalties or interest will accrue in the meanwhile with respect to any tax that may be payable on such revenues until such time as a formal notification is issued.
Each state is responsible for making this choice. Intricate and complicated procedures regulate loan forgiveness in public-private partnerships (PPPs), as well as tax ramifications. Get excellent guidance.
If you got PPP loan, here’s what you need to know to file taxes
It is likely that debt forgiveness under a public-private partnership will result in taxable income under state and municipal tax laws. However, a growing number of jurisdictions have determined that they would follow the federal treatment of PPP debt forgiveness and will not subject the forgiveness to state income tax in order to comply with the federal handling of PPP loan forgiveness. State Taxes in Washington A resolution has been reached on the impact of federal COVID-19 initiatives, including debt forgiveness under the Public-Private Partnership (PPP), on Washington taxes.
Small enterprises and non-profit organizations who obtained a federal Paycheck Protection Program (PPP) loan and/or an Economic Injury Disaster Loan (EIDL) advance are included in this category.
As a result of the subsequent confusion, the Department of Revenue addressed the issue as follows: It is the department’s belief that there may be a vested interest in clarifying the applicable legislation, particularly once the numerous programs at issue have been identified and properly evaluated.
Between now and the end of the fiscal year, no penalties or interest will accumulate in connection with any tax that may be owing on such revenues.
States must make their own decisions on this matter.
Get excellent guidance.
Forgiven PPP loans are not taxable
When you have a company debt and it is forgiven, it instantly becomes taxable income, both historically and in the future.” According to Hall, “it has been in the Internal Revenue Code for a very long time.” Loans made under the Paycheck Protection Program violate this rule. Congress specifically stated, and the Internal Revenue Service confirmed, that forgiven PPP loans will not be included as income. This is true regardless of whether your full debt is forgiven or only a portion of it. The forgiven amount will not be included in taxable income.
You can deduct expenses paid with PPP loan
This one has been more of a moving target than the other two. The Internal Revenue Service initially said that expenses paid with PPP loan funds could not be deducted if the loan had been or would be forgiven. That changed, however, with the passage of the Coronavirus Relief Act, which was signed into law on December 27, 2020, and which states that deductions should not be prohibited only because a debt has been forgiven. This means that costs incurred as a result of your PPP loan are tax deductible.
“The first advantage is that the loan is not subject to income tax,” Pandey explains. In addition, firms are permitted to claim income deductions for costs they have incurred.
Business taxes are not an allowable use of PPP funds
With this one, the goalposts have been shifting. It was formerly believed that expenses paid using PPP loan funds could not be deducted if the loan had been or would be forgiven. However, the IRS has now changed its view. With the passage of the Coronavirus Relief Statute, which was signed into law on December 27, 2020, this was no longer the case, since the act states that deductions should not be prohibited just because a loan has been forgivably repaid. In other words, all costs incurred as a result of your PPP loan are tax deductible.
A major advantage, according to Pandey, is that the loan is tax-free.
You can still claim the employee retention tax credit
Small businesses that fulfill the criteria for the Employee Retention Tax Credit can now claim the credit. You cannot recover wages paid with a forgiven PPP loan, which is an essential caution to keep in mind. If you have earned income in excess of the amount forgiven, you can claim a credit for those earnings. To be eligible for the tax credit, your business must continue to pay employees while being temporarily closed down due to COVID-19 limits or experiencing a 20 percent decrease in gross sales as compared to the same quarter the previous year, whichever is greater.
- The credit is valid for eligible earnings paid between July 1, 2018 and July 1, 2021.
- Kelsey Sheehy is a writer for the NerdWallet website.
- The storefront of Neon Shop Fishtail, which opened on Western Avenue in Chicago’s Bucktown area on December 3, 2020, may be viewed here.
- (Photo courtesy of Brian Cassella / Chicago Tribune)
IRS provides guidance for PPP loan forgiveness
The Internal Revenue Service (IRS) recently issued guidance (Rev. Proc. 2021-48 and Rev. Proc. 2021-49) on the timing of gross receipts and tax-exempt income from the forgiveness or partial forgiveness of Paycheck Protection Program (PPP) loans (Rev. Proc. 2021-48 and Rev. Proc. 2021-49) for businesses. PPP loans were established under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which provides for loan forgiveness if the revenues of the loan are utilized to pay for qualified expenditures.
- Although forgiven loans are not included in gross income, such sums are included in gross receipts for the purposes of some federal tax rules, including the Internal Revenue Code.
- It was unclear whether to include forgiven sums in gross receipts and when the loan principal transitioned to tax-exempt income for the purposes of determining basis and other considerations due to a lack of guidance on the timing of the transition.
- 2021-49 provides guidelines for partnership and consolidated groups on the treatment of items excluded from gross income, with a particular emphasis on the treatment of basis allocations.
2012-48 also addresses initial concerns that a lack of guidance would potentially result in a mismatch between income and expenses—as some entities may not have deducted expenses prior to a statutory change in the Tax Relief Act of 2020 reversed IRS guidance requiring taxpayers to reduce deductions for expenses paid with forgiven loan proceeds—by clarifying that the IRS guidance was intended to be temporary.
- The Tax Relief Act of 2020 provides a safe harbor for persons who failed to deduct normally deductible PPP qualified costs on a tax return that was submitted before to the implementation of the tax relief act.
- In accordance with Section 6227 of the Internal Revenue Code, Rev.
- 2021-48 directs taxpayers to declare tax-exempt income on an original or modified federal income tax return, information return, or administrative adjustment request (AAR) that is timely submitted.
- More information may be found in Rev.
- 2021-50, which is available online.
- One notable distinction is that, unlike previous regulations, Rev.
- 2021-49 does not prescribe a specific method for a partnership to allocate deductions funded by a PPP loan to its partners, but rather requires that such deductions be allocated in accordance with each partner’s overall interest in the partnership.
Revenue Procedure 2021-48 is in force for any taxable year in which a taxpayer paid or incurred qualified costs listed in the revenue procedure, as well as for any taxable year in which a taxpayer applied for loan forgiveness or was granted loan forgiveness under the terms of that application.
The Washington National Tax Office’s Kim Principal, Partnerships may be reached at 202 521 1590.
For those of you who are interested in the subjects covered in this article, we invite you to contact us or an independent tax professional to explore how they could apply to your specific circumstances.
Any written tax advice contained in, forwarded with, or attached to this content, to the extent that it may be considered to contain written tax advice, is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
It is not intended to be, and should not be considered as, accounting, legal, or tax advice supplied to the reader by Grant Thornton LLP.
This material may also involve consideration of tax and nontax aspects that are not discussed here.
It is possible that changes in tax legislation or other variables will have an impact on the information included in this publication, whether on a prospective or retrospective basis; Grant Thornton LLP makes no commitment to notify the reader of any such changes.
Everything that is referred to as Section, Section., or “Sec.” is a reference to the Internal Revenue Code of 1986, as modified.
Recent IRS Guidance Addresses the Taxability of PPP Loan Forgiveness
15th of December, 2021 Paycheck Protection Program (PPP) loans were made to businesses, and such businesses can seek for forgiveness once they have spent all of the loan funds for which they are requesting forgiveness. The Internal Revenue Service (IRS) announced a series of three Revenue Procedures on November 18, 2021, covering the tax consequences of forgiving a PPP debt. Here’s a quick summary of what each one is. Revenue Procedure 2021-48allows taxpayers to classify the following sums as received or accrued if they are excluded from gross income (tax-exempt income) in connection with the forgiveness of public-private partnership (PPP) loans:
- On the 15th of December in the next year Paycheck Protection Program (PPP) loans were made to businesses, and those businesses can petition for forgiveness once they have used up all of the loan profits for which they are asking for forgiveness. IRS Revenue Procedures were announced on November 18, 2021, to handle the tax consequences associated with the forgiveness of PPP loans. The Revenue Procedures were issued in three parts. An overview of each is provided below. Revenue Procedure 2021-48allows taxpayers to regard the following sums as received or accrued if they are excluded from gross income (tax-exempt income) as a result of the forgiveness of PPP loans:
The revenue procedure applies to the extent that tax-exempt income resulting from the forgiveness of a PPP loan is treated as gross receipts under a specific federal tax provision. The revenue procedure is used to determine the timing of such gross receipts and, to the extent applicable, the reporting of such gross receipts. Specifically, Revenue Procedure 2021-49provides guidance for partnerships and consolidated groups on sums excluded from gross income and deductions related to the Partnership Partnership Program (PPP) and certain other COVID-19 relief programs.
Also included is information about corresponding basis adjustments for stock of subsidiary members of consolidated groups that are made as a result of tax-exempt income derived from certain forgiven PPP loans, grant proceeds, or the subsidization or deferred payment of certain principal, interest and fees.
We Can Assist You If you have any queries concerning loan forgiveness under the PPP, please contact us.
The IRS’s Thanksgiving Gift To PPP Borrowers
Getty ImagesA shot of money in a cornucopia This year, the majority of Americans have a great deal to be thankful for. The economy is doing well, there are plenty of jobs available, and most small firms are faring considerably better than had been anticipated in the short term. During the year 2020, when the Coronavirus struck, hundreds of firms were forced to close, resulting in a loss in sales revenues, but costs remained constant. A total of nearly $800 billion in forgivable loans to small businesses was provided through the PPP program, which enabled them to meet payroll, rent, and other expenses, all of which were tracked and coordinated so that the loan would be forgiven if it was handled properly.
Due to the resulting significant losses suffered by thousands of small businesses that are treated as S corporations or partnerships for federal tax purposes, the loss limitation rules applied to S corporation shareholders, which prevented them from realizing a loss if their stock had insufficient value to offset the loss.
The loss is only allowed to the extent of the basis in the stock; therefore, the owners could only recognize $50,000 of the loss (based on the shareholders having a $50,000 basis in their stock), with the remaining $25,000 loss being carried forward to be recognized when the shareholders have sufficient basis in their stock.
So long as at least $25,000 in debt forgiveness is received by the S company in the preceding case, the shareholders are permitted to take their losses.
It was preferable for many shareholders to defer the loss until the year 2020 because of the more liberalized Net Operating Loss (NOL) rules that became effective in 2020 under the CARES Act.
NOLs will only be able to offset 80 percent of income in 2021, and they will not be able to be carried back.
It provides that a taxpayer may treat tax exempt income received or accrued as “received or accrued” as a result of PPP loan forgiveness at the time that any of the three options listed below occurred. The taxpayer may choose any of the three options listed below.
- When Eligible Expenses were really spent (also known as “paid or incurred” by us tax geeks)
- When the taxpayer submits his or her PPP forgiveness application
- Or when the forgiveness took place.
This means that the vast majority of PPP borrowers who received their first loan and spent the first money on expenses will be able to choose whether to deduct the expenses on their 2020 tax return, if they have not already done so, or on their 2021 tax return, to the extent that their basis did not allow them to deduct the expenses in 2020, regardless of whether or not they apply for forgiveness until 2020 and receive confirmation of forgiveness until 2021.
A second provision of the Revenue Procedure provides guidance for taxpayers who do not receive forgiveness in an amount equal to the amount of tax-exempt income they received in a prior year, and it states that such taxpayers must make “appropriate adjustments on an amended Federal income tax return, information return, or Administrative Adjustment Request (AAR)” for the previous year.
While it may seem obvious to consider forgiveness to have occurred as soon as possible after expenditures have been paid, taxpayers may be better served by considering forgiveness as if it has not occurred until it has really occurred in some cases.
To avoid being penalized, it may be advantageous to defer the “receipt” until the following tax year if the taxpayer is about to cross a threshold based on “gross receipts,” such as in a situation where the amount of gross receipts would require a taxpayer to switch from the cash to the accrual method of accounting, for example.
Getting good news from the IRS can be as unusual as receiving praise or encouragement from the Forbes editors, at least on the surface of the situation.
It was previously discussed in an article titled “The Death Of The Fourth Quarter Employee Retention Credit,” which I wrote about changes to the employee retention credit (ERC). Click here to visit my YouTube channel where you may learn more about Estate Tax Planning, PPP, ERC and other topics.
Taxation of Forgiven PPP Loans
Written bySage H. O’Neil Payment Protection Program (PPP), established as part of the CARES Act, has offered hundreds of billions of dollars in loans to small and medium-sized enterprises (SMEs) across the country. Currently, the Small Business Administration (SBA) has forgiven a significant number of PPP loans, with more forgiveness petitions either under consideration or not yet received by the SBA, according to the organization. Despite the relatively straightforward mechanics of the distribution and forgiveness of PPP loans, the taxation of costs paid with PPP loan proceeds as well as the forgiveness of PPP loans has continued to change, leaving a maze of laws for taxpayers to maneuver through.
- Section 1106(i) of the CARES Act, on the other hand, exempts forgiven PPP loans from federal income taxation under certain conditions.
- In the beginning, the IRS stated that such expenses were not deductible.
- The Internal Revenue Service (IRS) issued Rev.
- 2021-2 on January 6, 2021, formally reversing its previous stance on deductions in order to comply with the new legislation.
- However, the increase in basis for forgiven sums that a partner receives under Section 705 of the Code is statutorily equal to the partner’s distributive share of the deductions connected to the forgiven amounts.
- Which states exclude PPP loan forgiveness from taxable income, which states allow deductions for expenditures paid with PPP loan profits, and which states allow both are determined by how closely each state adheres to the Code.
- States in both categories, on the other hand, regularly opt to adhere to some sections of the Code while rejecting other elements of the Code.
- According to the remaining states, the laws vary depending on the sort of business tax levied by each state and the state’s individual policy decisions.
- Minnesota is a static conformance state, which means that it adhered to the Code previous to the passage of the CARES Act until July 2021.
- Even however, the Minnesota Department of Revenue has not updated their website to reflect these changes as of the time of this writing, despite the fact that they have reported that they changed the appropriate pages on July 26, 2021.
- The extent to which other states that comply with federal law generally on the taxation of PPP loans adopt this strategy is dependent on the manner in which each state opted to comply with federal law in the first place.
Paycheck Protection Program
Paycheck Protection Program (“PPP”) loan forgiveness is not taxable for state income tax purposes to the extent that the amount of loan forgiveness is excluded from federal gross income (as defined in the Paycheck Protection Program (“PPP”) loan).
Expenses Deducted Under a Forgiven PPP Loan
For the purposes of computing taxable income in North Carolina, any costs paid with the proceeds of the forgiven PPP loan that are ordinarily deductible at the federal level are not deductible for determining taxable income in the state. The amount of expenses deducted on the federal return must be increased by an amount equal to the amount of expenses deducted on the North Carolina return if the expenses were paid with proceeds from a PPP loan, the loan is later forgiven, and the income associated with the PPP loan forgiveness is not included in federal gross income.
income tax purposes in the taxable year in which the expenses were paid or incurred if the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period.
A corporation’s federal taxable income must be increased by the amount taken from it on Schedule H of Form CD-405, C-Corporation Tax Return, for the tax year during which the costs were deducted.
For fiscal year filers, this should be included to the tax return for the year in which the costs were claimed as deductions.
Example 1: The taxpayer is a business that has filed as a C-Corporation with the IRS. The taxpayer obtains a public-private partnership loan and utilizes the money to pay employee salary and company office lease. The debt under the PPP is later forgiven. The forgiveness of the PPP loan is not included in the taxpayer’s federal taxable income. Employee wages and office rent are examples of business costs that can be deducted from a taxpayer’s federal income tax return when using forgiven PPP loan profits (employee salaries and office rent).
- It is necessary for the taxpayer to provide an adjustment on his or her North Carolina tax return for the amount of business costs deducted on his or her federal tax return that were paid using the proceeds of the PPP loan.
- The debt under the PPP is later forgiven.
- Taxpayer is also permitted to deduct from his or her federal income tax return the business expenditures paid with the forgiven PPP loan profits (employee salary) he or she incurred.
- When filing Taxpayer’s North Carolina return, Taxpayer is required to include an adjustment for the amount of business costs that were deducted on Taxpayer’s federal return and that were paid using the proceeds of the PPP loan.
- The taxpayer utilizes the loan profits to pay for personal costs, which is permitted under federal law.
- Taxpayer does not include the forgiven PPP loan profits in Taxpayer’s adjusted gross income on Taxpayer’s federal individual income tax return because the forgiven PPP loan proceeds are not taxable income.
- Taxpayer will not include the amount of the PPP loan forgiveness on his or her individual income tax return filed with the North Carolina Department of Revenue.
For example, if the taxpayer is a single proprietor who obtains a PPP loan and utilizes the loan to pay employee salaries, the situation is as follows: On or about November 2020, Taxpayer applied to the PPP lender for forgiveness of the covered loan, as permitted by Section 1106 of the CARES Act, in consideration of the qualified costs it paid during the covered period.
Taxpayer met all of the conditions of Section 1106 of the CARES Act for forgiveness of the covered debt at that time, based on the payment of the qualifying costs made by Taxpayer at the time of the payment.
Taxpayer is required to include an adjustment on his or her 2020 North Carolina individual income tax return for the amount of business expenses deducted on Taxpayer’s federal return that were paid with the proceeds of the PPP loan because Taxpayer reasonably anticipates receiving forgiveness of the covered loan at the end of the taxable year in which the adjustment is made.
The S-Corporation obtains a PPP loan, which it utilizes to pay for staff salary and company office rent, among other things.
The discharge of the PPP loan is not included in the federal taxable income of the S-Corporation.
The S-Corporation is not obliged to include an adjustment for the amount of the PPP debt forgiveness on its North Carolina tax return.
On Schedule I, line 1 of Form CD-401S, there is a provision for this addition (S-Corporation Tax Return). The taxpayer next files their North Carolina tax return using the K-1 form given by the S-Corporation.
More details may be found in Session Law 2020-58. in addition to an Important Notice: North Carolina’s Reference to the Internal Revenue Code Has Been Updated – Implications for North Carolina Corporate and Individual Income Tax Returns.