New Reporting Requirement for PPP Loan Forgiveness

Taxpayers with tax-exempt income from the forgiveness of a Paycheck Protection Program (PPP) loan must attach a statement to their tax return for each year they include such tax-exempt income in gross receipts. Thus, taxpayers must determine the year, or years, in which they may treat the tax-exempt income associated with the forgiveness of a PPP loan as received or accrued, and recently released Revenue Procedure 2021-48 explains how to make that determination.

PPP Loan Forgiveness

The Coronavirus Aid, Relief, and Economic Security (CARES) Act established the PPP loan program to provide loans to small businesses impacted by the COVID-19 pandemic. The program forgives the full principal amount of the loan up to the total amount used to pay for eligible expenses, and it excludes the forgiven amount from a taxpayer’s gross income.

The COVID Tax Relief Act provides that the amount of PPP loan forgiveness that a taxpayer receives is treated as tax-exempt income for purposes of IRC Sections 705 (Determination of Basis of Partner’s Interest) and 1366 (Pass-Thru of Items to [S Corporation] Shareholders). In addition, Rev. Proc. 2021-33 provides that taxpayers may exclude the amount of PPP loan forgiveness from gross receipts solely for purposes of determining eligibility to claim the Employee Retention Credit. Taxpayers may not, however, exclude any amount of PPP loan forgiveness from gross receipts for any other Federal tax purposes, including determining gross receipts under IRC Section 448(c) (Gross Receipts Test).

As a result, it is necessary for taxpayers that had a PPP loan forgiven to determine the year, or years, in which the taxpayer may treat the tax-exempt income associated with the forgiveness as received or accrued. According to Rev. Proc. 2021-48, taxpayers may treat the tax-exempt income associated with PPP loan forgiveness as received or accrued:

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

Taxpayer Statement

In accordance with Rev. Proc. 2021-48, the 2021 instructions to Forms 1040, 1041, 1065, 1120, and 1120-S require taxpayers that recognize tax-exempt income from a forgiven PPP loan to attach a statement to the taxpayer’s tax return for each tax year in which the tax-exempt income is recognized. The statement should include the following information for each PPP loan:

• The taxpayer’s name, address, and EIN or SSN;
• Which section(s) of Rev. Proc. 2021-48 the taxpayer is applying (section(s) 3.01(1), (2), or (3));
• The amount of tax-exempt income from forgiveness of the PPP loan that the taxpayer is treating as received or accrued during the year; and
• Whether or not forgiveness of the PPP loan has been granted as of the date the return to which the statement is being attached is filed.

Amending 2020 Tax Returns

Taxpayers do not need to amend their 2020 tax return just to attach the Rev. Proc. 2021-48 statement if they properly reported tax-exempt income from a forgiven PPP loan on their 2020 tax return in accordance with Rev. Proc. 2021-48.

Taxpayers who did not report tax-exempt income from a forgiven PPP loan on their 2020 tax return, but should have, need to file an amended 2020 tax return, or an Administrative Adjustment Request (AAR), if applicable, to report the tax-exempt income and include the Rev. Proc. 2021-48 statement.

Likewise, taxpayers who report tax-exempt income from PPP loan forgiveness prior to the year when forgiveness of the PPP loan is actually granted should consider filing an amended return (or, if applicable, an AAR) for the year the tax-exempt income was reported if the amount of tax-exempt income reported is more than the forgiveness ultimately granted. The amended return (or AAR) should include a statement that contains the following information:

• The taxpayer’s name, address, and EIN or SSN;
• A statement that the taxpayer is making adjustments in accordance with Section 3.03 of Rev. Proc. 2021-48; and
• The tax year in which tax-exempt income was originally reported, the amount of tax-exempt income that was originally reported in that tax year, and the amount of tax-exempt income being adjusted on the amended return.

For more information regarding these new reporting requirements, contact us. We are here to help.

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