Taxpayers may treat such income as received or accrued when either (1) expenses eligible for forgiveness are paid or incurred; (2) an application for PPP loan forgiveness is filed; or (3) PPP loan forgiveness is granted.
Are PPP loans taxable?
- Forgiven PPP loans are not taxable Historically, if you had a forgiven business loan, it used to be automatically taxable income based on long-time internal revenue codes. Now, however, Paycheck Protection Program loans break from that code.
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.
Is the second PPP loan taxable?
With the Second Draw PPP, loan proceeds were for the second 8 to 24-week period following loan disbursement. Businesses who were able to meet all these requirements could wind up with their entire PPP loan amounts forgiven on a federal level, and with no income taxes due on these amounts.
How do I report forgiven PPP loans on my taxes?
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.
Is PPP taxable income?
For California purposes, forgiven PPP loans are excluded from gross income.
What are the tax consequences of the PPP loan?
The CARES Act introduced PPP loans and established that the amount of the PPP loan forgiven was to be treated as tax-exempt income on the borrowers’ federal tax returns. But the IRS initially disallowed deductions for otherwise eligible PPP-related expenses, essentially negating the benefit of the income exemption.
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.
Is SBA debt relief taxable?
Established by the CARES Act and revised by the Economic Aid Act, the SBA is authorized to automatically pay 6 months of principal and interest, and any associated fees that borrowers owe for all 7(a), 504, and Microloans. Now we know that any amounts the SBA paid on behalf of the borrower are not taxable for Federal.
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).
- 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. In the event that you have any queries about the options for recognizing the loan forgiveness income from PPP, please contact your Cherry Bekaert tax adviser.
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.
Procs. 2021-48 and 2021-49 and have met certain other requirements listed in these revenue procedures. — Paul Bonner ([email protected]) is a senior editor for the Journal of Accounting.
If you got PPP loan, here’s what you need to know to file taxes
Is it possible to deduct costs that you paid with your loan funds? Do you need to make any changes to your routine this year? And, if your debt is forgiven, is the amount you get tax-free considered income? Answers to these queries have been difficult to come by, in part because of the IRS’s fluctuating instructions. However, new guidelines laid out in the most recent round of coronavirus treatment are helping to put a stop to the misunderstanding. Keith Hall, president and chief executive of the National Association for the Self-Employed, notes that before COVID, “filing your taxes was a difficult task.” “The good news is that your tax returns this year will not be any more difficult than they have been in the past.”
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.
Business taxes are not an allowable use of PPP funds
The current wave of coronavirus relief also provides business owners with greater choice in how they spend their PPP payments, according to the CDC. Protective equipment, property damage, and company software are among the new expenditures that are being reimbursed. Business taxes are not included in this enlarged list of exemptions. As a result, if you use your PPP loan to pay your company taxes, you will not be eligible for a debt forgiveness.
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.
The company acquired a $23,866 Paycheck Protection Program loan and used the funds to maintain two full-time employees while also covering expenditures such as rent and sign-repair equipment. (Photo courtesy of Brian Cassella / Chicago Tribune)
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.
The IRS’s Thanksgiving Gift To PPP Borrowers
Shot of money in cornucopiagetty Most Americans have a lot to be thankful for this year. The economy is doing well, jobs are plentiful, and most small businesses are doing much better than had been expected. Things were much worse in the year 2020, when the Coronavirus shut down thousands of businesses, and deprived them of sales revenues, while expenses stayed constant. The PPP program provided almost $800 billion of forgivable loans to small businesses that enabled them to meet payroll, rent, and other expenses, which were tracked and coordinated so that the loan would be forgiven if properly handled.
As the result of this thousands of small businesses that are treated as S corporations or partnerships for federal tax purposes had significant losses, but were challenged by loss limitation rules which prevented S corporation shareholders from recognizing a loss if they did not have sufficient basis in their stock.
Under the S corporation loss limitation rules, a loss is only allowed to the extent of basis, therefore the owners could only recognize $50,000 of the loss (based upon the shareholders having a $50,000 basis in their stock), and the excess $25,000 loss is carried over to be recognized when the shareholders have sufficient basis.
Therefore, if the S corporation in the above example had at least $25,000 of loan forgiveness in 2020 then the shareholders could take their losses.
Many shareholders were better off taking the losses in the year 2020, because of the more liberalized Net Operating Loss (NOL) rules that applied in 2020 under the CARES Act, whereby a taxpayer could offset up to 100 percent of income with NOLs, and also carry back a NOL for up to five years to receive a refund from tax paid in prior years.
The question of when a loan can be considered to be forgiven for the purposes of providing tax basis remained unanswered until November 18, 2021 when the IRS released Revenue Procedure 2021-48.
It provides that a taxpayer may treat the tax exempt income as a result of PPP loan forgiveness as “received or accrued” at the time that any of the following three options occurred that the taxpayer may choose from:
- 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.
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:
- As qualified costs are paid or incurred, a credit will be applied. When a request for PPP debt forgiveness is submitted, or when a request for PPP loan forgiveness is approved
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.
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. When completing Form 1040, keep in mind the following:
- 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.
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.
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.
- Taxpayers who have already filed Federal income tax returns may amend their returns to incorporate IRS guidance on the timing and allocation of tax-exempt income and deductions relating to PPP loans
- However, if you have already filed your Federal income tax returns, you will not be able to amend your returns.
CARES Act allows cancellation of indebtedness revenue resulting from the forgiveness of a Paycheck Protection Program (PPP) loan (also known as “tax-exempt income”) to be deducted from gross income up to the amount of qualified expenses incurred. (See our linked blog posthere for more information on what counts as an eligible item and how eligible expenses might be reduced.) Tax-exempt income and related adjustments are treated differently by the IRS, according to three revenue procedures that were recently released by the Internal Revenue Service.
The timing and reporting of the receipt of tax-exempt income via PPP forgiveness are discussed in detail.
- 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.
PPP forgiveness and expenses: State tax implications
This story was first published on January 15, 2021, and has been modified to reflect current events. The Payroll Protection Program (PPP) is one of the most significant relief measures included in the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (PPP). As a result of the COVID-19 problem, the PPP is intended to aid both for-profit and nonprofit enterprises in retaining their payroll. Under the program, the Small Business Administration provides 100 percent federally insured loans for a variety of costs that are covered by insurance.
Under normal circumstances, forgiven loan amounts are normally taxable for federal income tax purposes; but, under Section 1106(i) of the CARES Act, the forgiveness of PPP loans is specifically excluded from federal gross income, and hence from federal income tax.
Will forgiven loan amounts be subject to state income taxation?
Determining whether debt forgiveness provided under the CARES Act is subject to state taxation appears to be an easy task at first appearance. In the twenty-odd states and the District of Columbia that have rolling conformity to the Internal Revenue Code (IRC), it is likely that the forgiven debts will not be liable to taxation in the future. These states are in compliance with the most recent edition of the IRC, which includes any additions or adjustments that may have occurred after the last version was published.
- As a result, taxpayers who get loan forgiveness in states with static or fixed-date compliance may be subject to significant state income tax penalties as a result of the loan forgiveness.
- Having said that, taxpayers should be mindful that it is impossible to make broad statements regarding conformance at a period of rapid change at the state and federal levels.
- Many static conformance states, on the other hand, are likely to follow the federal exception in this case.
- There’s another twist to this story.
- The forgiveness clause does not alter the Internal Revenue Code.
- A state could argue that section 1106(i) has no impact on whether or not the loans are forgiven for state tax purposes when reviewing state conformity for the purposes of the PPP loan forgiveness exclusion.
- Therefore, even in states that comply with the Internal Revenue Code, the federal loan forgiveness rules may not apply to the state computation of taxable income, with the forgiveness being counted as part of taxable income in the state in question.
Even though this issue is very complicated, taxpayers should be mindful that states may need to provide further guidance clarifying that PPP loans are forgiven for state tax purposes as well, as the situation is currently unclear.
What about expenses?
An extra layer of complication at the state level is the consideration of expenditures incurred as a result of the use of money from the PPP. To begin with, the IRS issued Notice 2020-32, which stated that taxpayers who receive loan forgiveness under the terms of the PPP are not permitted to “double-dip” by deducting the amount paid out to employees as an expense, even if the payment of the expense results in the forgiveness of the loan. This was the first time the IRS addressed the issue. As of Dec.
- The IRS then declared the Notice to be no longer valid.
- The states are expected to issue guidelines on whether or not they would allow taxpayers to receive a ‘double benefit’ with regard to PPP revenue and costs in the final phase of the implementation process.
- Others are following suit.
- According to Section 1106(b) of the CARES Act, an additional modification is required for any costs deducted under the Internal Revenue Code to the extent that payment of the expense resulted in forgiveness of a covered debt under the provisions of the bill.
- For both people and organizations, that notice gives crystal clear guidance on how it would address both of these challenges under the new law.
- When determining taxable income in North Carolina, any costs incurred using the proceeds of the PPP loan and claimed as a deduction for federal tax purposes are not allowed to be claimed as deductions.
- A majority of states have either published guidelines or passed legislative changes that exclude forgiven loans from state taxable income and allow for the deductibility of related costs until the beginning of October in 2021.
It is important for taxpayers to carefully consider the state tax ramifications of asking for PPP loans, as well as the repercussions of being successful in having those debts forgiven. Before adopting a position on a return, it is necessary to carefully analyze the general conformance regulations governing debt forgiveness, the state’s reaction to and compliance with the CARES Act, and the state’s response to and conformity with the CAA for costs, among other things. Moreover, it is critical to comprehend the more nuanced opportunities and hazards involved with state taxation of debt forgiveness.
Some states, on the other hand, may approach the forgiveness and expenditure deduction in a different manner for corporation and individual taxpayers.
Due to this, taxpayers may choose to consider filing extensions in order to give the states extra time in which to publish guidance or pass legislative adjustments to the existing tax system.
People who have questions concerning the state reaction to PPP compliance and expenditure deduction are strongly recommended to contact their tax advisors because the state guidance on these topics is always changing and improving.
Whiteford Taylor Preston, LLP
Paycheck Protection Program (“PPP”) loans were initially exempt from federal income taxation under the CARES Act, and later legislation clarified that expenses covered using PPP money would continue to be tax deductible. The Internal Revenue Service (“IRS”) published three independent revenue procedures regarding the tax treatment of debt forgiveness under public-private partnerships (“PPPs”) on November 17, 2021: Rev. Proc. 2021-48, Rev. Proc. 2021-49, and Rev. Proc. 2021-50. PPP loan forgiveness is addressed in Rev.
2021-48, which handles the timing of the receipt or accrual of tax-exempt income resulting from the forgiveness of the debt.
The timing and possible reporting of tax-exempt income arising from PPP loan forgiveness are likewise governed by these laws, to the extent that tax-exempt income coming from PPP loan forgiveness is recognized as gross receipts for federal tax purposes.
According to the Internal Revenue Service, “This revenue procedure provides guidance to partners and their partnerships regarding allocations under Section 704(b) of the Internal Revenue Code and the corresponding adjustments to be made with respect to the partners’ bases in their partnership interests under Section 705 of the Internal Revenue Code.
The final provision of Revenue Procedure 2021-50 allows eligible partnerships to file amended partnership returns for taxable years ending after March 27, 2020, provided that certain requirements of Revenue Procedure 2021-49 are met and that the amended partnership returns are filed before December 31, 2021.
It is possible that you may want to examine the implications of this IRS guideline with your tax experts as you finalize your year-end tax preparation decisions.
When seeking legal counsel, it is not advisable to choose a lawyer solely on the basis of promotional materials. Instead, we urge that you perform more research.
Which States Are Taxing Forgiven PPP Loans?
Keep in mind that the map and table below represent the tax treatment of PPP loans forgiven in 2020, but necessarily the tax treatment of PPP loans forgiven in 2021. Even while the vast majority of states are on schedule to apply consistent tax treatment to debts forgiven in 2020 and 2021, this is not the situation in every state. Recent Changes may be found here. During the COVID-19 epidemic, the Small Business Administration’sPaycheck Protection Program (PPP) is providing a critical lifeline to millions of small companies, allowing them to continue operating and keeping their employees in their jobs.
Normally, a forgiven debt qualifies as income under the tax code.
Many states, on the other hand, remain committed to taxing them, either by considering forgiven loans as taxable income or by refusing the deduction for costs incurred as a result of using forgiven loans, or by doing both.
|State||Excludes from Taxable Income||Allows Expense Deduction|
|California**||✔||Deductible for Some Businesses|
|Ohio*||✔||Deduction Allowed Under PIT (not CAT)|
|Rhode Island**||Excluded for Some Businesses||✔|
|South Dakota||No Individual or Corporate Income Tax|
|Virginia**||✔||Allows Partial Deduction|
|Wyoming||No Individual or Corporate Income Tax|
|District of Columbia||✔||✔|
|Notes:*Nevada, Texas, and Washington do not levy an individual income tax or a corporate income tax but do levy a GRT. Ohio imposes an individual income tax and a GRT. Nevada treats forgiven PPP loans as a taxable gross revenue; Ohio, Texas, and Washington do not. In Ohio, Nevada, and Washington, there is no deduction for business expenses, consistent withgross receipts tax ation. Under Ohio’sindividual income tax, forgiven PPP loans are excluded from taxable income and the expense deduction is allowed. Under Ohio’s Commercial Activity Tax (CAT), the loans are excluded from taxable gross revenue but, consistent with gross receipts taxation, the CAT does not allow a deduction for business expenses.** Virginia excludes forgiven PPP loans from taxable income but allows only the first $100,000 in expenses paid for using forgiven PPP loans to be deducted. California conforms to the federal tax treatment of forgiven PPP loans for some but not all businesses; the state excludes forgiven PPP loans from taxation, but the expense deduction is disallowed for publicly traded companies and businesses that did not experience a 25 percent year-over-year decline in gross receipts between 2019 and 2020. Rhode Island allows an exclusion from taxable income only for forgiven PPP loans of $250,000 or less.Sources: Tax Foundation; state tax statutes, forms, and instructions; Bloomberg BNA.|
Why do states have such disparate taxing procedures when it comes to public-private partnership (PPP) loans? In the end, it comes down to whether or not states adhere to the federal tax rules. Despite the fact that all states utilize the Internal Revenue Code (IRC) as a starting point for their own tax codes, each state has the freedom to make revisions of its own own. Tax changes made by the federal government are immediately adopted by states that employ rolling conformity, which is the simplest system and gives the greatest level of assurance to taxpayers.
- It is usual for states to adhere to certain sections of the federal tax law while decoupling from others.
- Following the implementation of federal measures, states that employ rolling conformance may enact legislation to disassociate themselves from such changes.
- The decoupling of static conformance states from particular modifications that occur on an ad hoc basis occurs when static conformity states update their conformity dates.
- When the CARES Act was signed into law on March 27, 2020, Congress intended for forgiven PPP loans to be tax-free at the federal level, which is a break from the customary practice in the United States.
- Normal conditions would dictate that this is a legitimate practice.
- As a result, PPP loans were exempt from taxable income (although not by amending the IRC directly).
According to Treasury Department rulings issued in the months immediately following the CARES Act’s passage, expenses incurred through the use of public-private partnership loans were not deductible under existing law, citing Section 265 of the Internal Revenue Code, which generally prohibits businesses from deducting expenses associated with tax-free income.
As a result, on December 27, 2020, when the Consolidated Appropriations Act for 2021 was passed into law, the legislation was revised to specifically provide that costs incurred as a result of forgiven PPP loans would be deductible.
States that adhere to a pre-CARES Act version of the Internal Revenue Code normally regard forgiven federal loans as taxable income, but associated business expenditures (such as payroll, rent, and utilities) are treated as deductible.
Those states that employ rolling conformity, or that have otherwise amended their conformity legislation to reflect the IRC version in effect after the Consolidated Appropriations Act, both remove forgiven PPP loans from income and enable associated costs to be deducted from income.
State officials are now in a position to assist in ensuring that PPP recipients receive the full emergency benefit intended by Congress by abstaining from taxing these federal lifelines at the state level, a position that was previously unavailable.
Many states that now tax forgiven PPP loans, including Arizona, Arkansas, Hawaii, Maine, Minnesota, New Hampshire, and Virginia, have submitted legislation to ban such taxation, while the state of Wisconsin just enacted legislation to prevent such taxation.
Alternatively, if the baseline scenario is one in which forgiven PPP loans did not exist—the status quo ex ante—then implementing government instructions is revenue neutral in this situation.
State governments had not depended on or expected to be able to produce this kind of money. But if politicians want to avoid taxing these small company lifelines in the future, they must act swiftly since tax deadlines are rapidly approaching.