Taxpayers urgently need guidance on Paycheck Protection Program (PPP) loan forgiveness issues, the AICPA has told the IRS, and the AICPA has made recommendations proposing solutions to those issues.
The proposed solutions came in a letter sent March 15 from the AICPA Tax Executive Committee to two members of the IRS Chief Counsel’s office, asking for additional guidance and making recommendations on how to apply the Consolidated Appropriations Act (CAA), 2021, P.L. 116-260, and specifically Section 276 of the COVID-Related Tax Relief Act of 2021, enacted as part of the CAA. Section 276 of the act provides that expenses paid with forgiven PPP funds are deductible, that PPP borrowers are not to reduce any tax attributes, and that no basis increase shall be denied by reason of the exclusion of PPP forgiveness from gross income. Section 276 also provides S corporation and partnership PPP borrowers instructions for the tax treatment of the amount excluded from gross income due to PPP loan forgiveness. With tax filing deadlines approaching, practitioners and taxpayers need additional guidance on these provisions.
Under Section 276, S corporations and partnerships treat the exclusion from gross income as tax-exempt income, and shareholders and partners increase their tax basis in the S corporation or partnership based on their share of the tax-exempt income. However, the fact that the period in which qualifying expenses were paid does not necessarily match the period for obtaining PPP loan forgiveness adds complexity to the application of this basis increase.
The AICPA is recommending that Treasury and the IRS issue guidance stating that the proper period for the inclusion of the tax-exempt income due to Section 276 is when the PPP borrower pays or incurs qualifying expenses during the covered forgiveness period. The AICPA is also asking that the guidance state that the IRS does not intend to challenge treating the loan forgiveness as a ministerial act.
The second issue the letter seeks guidance on is the proper treatment of “related expenses” for S corporations. The AICPA recommends that for S corporation purposes, related expenses (qualified PPP expenses) that are deducted and attributed to the PPP loan not be taken into account for the accumulated adjustment account pursuant to Sec. 1368(e)(1)(A). Instead, the other adjustment account should include those related expenses because they directly relate to the tax-exempt income by operation of Section 276 due to PPP loan forgiveness. The AICPA asks Treasury and the IRS to issue guidance reflecting this proper treatment and disregard Regs. Sec. 1.1368-2(a)(3)(i) for this limited purpose.
Finally, the AICPA asks how to properly report these tax-exempt income amounts on Form 1065, U.S. Return of Partnership Income, and Form 1120-S, U.S. Income Tax Return for an S Corporation. Specifically, the AICPA explained that “there is no clear or uniform method to record forgiven PPP loans on a taxpayer’s return, such as how and where they are reported (i.e., on a particular line or schedule). In particular, the basis questions on Form 1065 and Form 1120-S are a concern for many PPP borrowers as this is a new and still quickly evolving program.” The AICPA recommended that the PPP loans should not be treated as debt for purposes of these questions.
AICPA experts discuss the latest on the PPP and other small business aid programs during a virtual town hall held every other week. The webcasts, which provide CPE credit, are free to AICPA members and $39.99 for nonmembers. Go to the AICPA Town Hall Series webpage for more information and to register. Recordings of Town Hall events are available to view for free on AICPA TV.
The AICPA’s Paycheck Protection Program Resources page houses resources and tools produced by the AICPA to help address the economic impact of the coronavirus.
Accounting firms can prepare and process applications for the PPP on the CPA Business Funding Portal, created by the AICPA, CPA.com, and fintech partner Biz2Credit.
— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.