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Part III
Administrative, Procedural, and Miscellaneous
26 CFR 601.105: Examination of returns and claims for refund, credit or abatement; determination of correct tax liability. (Also Part I, § 61.)
Rev. Proc. 2021-
SECTION 1. PURPOSE This revenue procedure provides that taxpayers may treat amounts that are excluded from gross income (tax-exempt income) in connection with the forgiveness of Paycheck Protection Program (PPP) Loans as received or accrued: (1) as eligible expenses are paid or incurred, (2) when an application for PPP Loan forgiveness is filed, or (3) when PPP Loan forgiveness is granted. To the extent tax-exempt income resulting from the forgiveness of a PPP Loan is treated as gross receipts under a particular Federal tax provision, including but not limited to §§ 448(c) and 6033 of the Internal Revenue Code (Code), this revenue procedure applies for purposes of determining the timing and, to the extent relevant, reporting of such gross receipts.
SECTION 2. BACKGROUND
.01 Overview. (1) The PPP is a loan program administered by the U.S. Small Business Administration (SBA) and the Administrator of the SBA (Administrator) as part of the SBA’s “7(a) Loan Program” under § 7(a) of the Small Business Act (15 U.S.C. § 636(a)).^1 Congress established the PPP to assist small businesses nationwide adversely impacted by the COVID–19 pandemic in paying payroll costs and other eligible expenses.^2 Under the PPP, the Administrator may guarantee the full principal amount of a “covered loan,” as defined in § 7(a)(36)(A)(ii) of the Small Business Act, which for purposes of the PPP is a loan made under the PPP to an “eligible recipient,” as defined in § 7(a)(36)(A)(iv) of the Small Business Act, during the period beginning on February 15, 2020, and ending on May 31, 2021 (PPP First Draw Loan).^3 Under § 7(a)(37) of the Small Business Act, the Administrator may guarantee under the same terms, conditions, and processes as a PPP First Draw Loan the full principal amount of a subsequent loan made under the PPP to an “eligible entity,” as defined in § 7(a)(37)(A)(iv) of the Small Business Act, that has used or will use the full amount of a
(^1) See §§ 1102 and 1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-94, 297-301 (Mar. 27, 2020), as amended by §§ 2 and 3 of thePaycheck Protection Program Flexibility Act of 2020, Public Law 116-142, 134 Stat. 641 (June 5, 2020); the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) enactedas Title III of Division N of the Consolidated Appropriations Act, 2021 (CAA), Public Law 116-220, 134 Stat. 1182 (Dec. 27, 2020); § 276 of the COVID-related Tax Relief Act of 2020 (COVID Tax ReliefAct), enacted as Subtitle B of Title II of Division N of the CAA; and § 2 of the PPP Extension Act of 2021, Public Law 117-6, 135 Stat. 250 (Mar. 30, 2021). Section 304(b)(1)(A) of the Economic Aid Actredesignated § 1106 of the CARES Act (15 U.S.C. § 9005) as § 7A and transferred redesignated § 7A to be inserted to appear after § 7 of the Small Business Act (15 U.S.C. § 636). (^2) See Business Loan Program Temporary Changes; Paycheck Protection Program, 85 FR 20811 (Apr. 15, 2020). (^3) See § 7(a)(2) of the Small Business Act and § 2 of the PPP Extension Act of 2021.
taxpayer experiences reductions in full-time equivalent employees or employee salary and wages during the covered period and the taxpayer does not qualify for any of the statutory or regulatory exemptions from the PPP loan forgiveness reduction rules.^7 .02 Forgiveness of PPP Loans. (1) Section 276(a)(1) of the COVID Tax Relief Act amended § 7A(i) of the Small Business Act to provide guidance on the Federal income tax consequences of the forgiveness of PPP First Draw Loans. Section 276(b) of the COVID Tax Relief Act provides substantially similar guidance with regard to PPP Second Draw Loans, as do §§ 278(a)(1) and (2) with regard to Section 1109 Loans. Specifically, § 7A(i) of the Small Business Act and §§ 276(b) and 278(a) of the COVID Tax Relief Act provide that, for purposes of the Code, no amount is included in the gross income of an eligible recipient or an eligible entity, as appropriate, by reason of the forgiveness of a PPP Loan, and no deduction is denied, no tax attribute is reduced, and no basis increase is denied, by reason of such exclusion from gross income. (2) Revenue Procedure 2021-20, 2021-19 I.R.B. 1150 (May 10, 2021), provides a safe harbor that allows certain taxpayers that, under prior guidance issued by the Treasury Department and the Internal Revenue Service, did not deduct certain otherwise deductible PPP-related expenses on a tax return that was filed prior to the enactment of the COVID Tax Relief Act to deduct such expenses in the next taxable year (that is, the taxable year following the taxable year in which such expenses were paid or incurred).
(^7) See § 7A(d) of the Small Business Act (as amended by § 304(b)(2) of the Economic Aid Act) and Business Loan Program Temporary Changes; Paycheck Protection Program – Loan ForgivenessRequirements and Loan Review Procedures as Amended by Economic Aid Act, 86 F.R. 8290 (Feb. 5, 2021).
(3) For eligible recipients and eligible entities, as appropriate, that are partnerships or S corporations, § 7A(i) of the Small Business Act and §§ 276(b) and 278(a)(3) of the COVID Tax Relief Act provide that any amount excluded from gross income under § 7A(i) of the Small Business Act or § 276(b) or § 278(a) of the COVID Tax Relief Act, as applicable, is treated as tax-exempt income for purposes of §§ 705 and 1366 of the Code. Section 7A(i) of the Small Business Act and §§ 276(b) and 278(a) of the COVID Tax Relief Act further provide that, except as provided by the Secretary of the Treasury or her delegate, any increase in the adjusted basis of a partner’s interest in a partnership under § 705 of the Code with respect to amounts treated as tax-exempt income under § 7A(i) of the Small Business Act, § 276(b) of the COVID Tax Relief Act, or § 278(a) of the COVID Tax Relief Act, as applicable, equals the partner’s distributive share of deductions resulting from costs giving rise to the forgiveness of the PPP Loans. Revenue Procedure 2021-49, 2021-49 I.R.B. ___ , released November 18, 2021, provides guidance for partners and their partnerships regarding allocations under § 704(b) of the Code of amounts excluded from gross income under § 7A(i) of the Small Business Act and § 276(b) or 278(a) of the COVID Tax Relief Act, as applicable, allocations under § 704(b) of the Code of deductions resulting from expenditures attributable to the use of certain PPP Loan proceeds, and corresponding adjustments to partners’ bases in their partnership interests under § 705 of the Code. Revenue Procedure 2021-49 also provides guidance under § 1502 of the Code and § 1.1502- of the Income Tax Regulations regarding the corresponding basis adjustments for stock of subsidiary members of consolidated groups as a result of tax-exempt income resulting from forgiveness of PPP Loans. To allow their partners or shareholders to
Act, 86 F.R. 8283 (Feb. 5, 2021) (Loan Forgiveness Requirements); Business Loan Program Temporary Changes; Paycheck Protection Program as Amended by Economic Aid Act, 86 F.R. 3692 (Jan. 14, 2021); Business Loan Program Temporary Changes; Paycheck Protection Program – COVID Revenue Reduction Score, Direct Borrower Forgiveness Process, and Appeals Deferment, 86 F.R. 40921 (July 28, 2021). To receive forgiveness of PPP First Draw Loans and PPP Second Draw Loans, the taxpayer must, among other things, complete and submit a “PPP Loan Forgiveness Application.” The amount of information and documentation, if any, that the taxpayer must provide to seek forgiveness and whether the taxpayer’s loan forgiveness amount is subject to a reduction depends on the facts and circumstances. The forgiveness approval process undertaken by lenders also depends on the facts and circumstances and the type of PPP Loan Forgiveness Application submitted by the taxpayer. Loan Forgiveness Requirements at 8295-96. SECTION 3. TIMING OF TAX-EXEMPT INCOME .01 Overview. Subject to section 3.03 of this revenue procedure, a taxpayer that received a PPP Loan may treat tax-exempt income resulting from the partial or complete forgiveness of such PPP Loan as received or accrued: (1) As, and to the extent that, the taxpayer pays or incurs eligible expenses as described in section 2.01(2). Under this section 3.01(1), a taxpayer that has elected to use the safe harbor provided under Revenue Procedure 2021-20 will be treated as paying or incurring the eligible expenses during the taxpayer’s immediately subsequent taxable year following the taxpayer’s 2020 taxable year in which the expenses were actually paid or incurred, as described in Revenue Procedure 2021-20;
(2) When the taxpayer files an application for forgiveness of the PPP Loan; or (3) When the PPP Loan forgiveness is granted. .02 Amended returns. Taxpayers may report tax-exempt income pursuant to section 3.01 on a timely filed original or amended Federal income tax return, information return or administrative adjustment request (AAR) under § 6227 of the Code. See also Revenue Procedure 2021-50, 2021-49 I.R.B. ___ , released November 18, 2021, allowing an eligible partnership to file an amended Form 1065, U.S. Return of Partnership Income , as an alternative to filing an AAR, and furnish a corresponding amended Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc. , to each of its partners. Partners and shareholders that receive amended Forms K- 1 as provided in this section 3.02 must file amended Federal income tax returns, information returns or AARs, as applicable, consistent with the Forms K-1 received. .03 When PPP Loan is not fully forgiven. Unless otherwise provided in the 2021 filing year form instructions, if the taxpayer receives forgiveness for an amount of the PPP Loan that is less than the amount that the taxpayer previously treated as tax- exempt income, the taxpayer must make appropriate adjustments on an amended Federal income tax return, information return or AAR, as applicable, for the taxable year(s) in which the taxpayer treated tax-exempt income from the forgiveness of such PPP Loan as received or accrued. Partners and shareholders that receive amended Forms K-1 as provided in this section 3.03 must file amended Federal income tax returns, information returns or AARs, as applicable, consistent with the Forms K- received. .04 Reporting consistent with this revenue procedure. The IRS will publish form
Gorham of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this revenue procedure, please contact Morgan Lawrence at (202) 317-7011 (not a toll-free call).
