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PPA Loan Forgiveness and Basis Adjustments

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PPA Loan Forgiveness and Basis Adjustments

The American Institute of Certified Public Accountants (AICPA) has recently requested guidance from the United States Treasury on Pass Through Entity Basis Adjustments resulting from PPP Loan Forgiveness, in particular, in the timing of the Adjustment.

The Consolidated Appropriations Act, enacted December 27, 2020, resolved the issue of whether expenses paid with PPP Loan funds that were later forgiven (or were expected to be forgiven) could be deducted.   The Act made clear that otherwise deductible expenditures paid with forgiven PPP Loan funds would be deductible when paid and further provided that tax basis and other attributes of the taxpayer would not be reduced as the result of loan forgiveness.  However, the AICPA noted that while forgiveness of a PPP Loan should create basis that Partnership and S-Corporation owners can use to deduct losses, they ask for clarification for what happens if the expenses are paid in one year, but the loan is not forgiven until a later tax year.

In their comment to the Treasury, the AICPA gave as an example a Subchapter-S Corporation with a single shareholder that received a $1 million PPP Loan in 2020 and expended that amount on qualified expenses, creating a $1 million loss in 2020.  If the owner has no basis in his S-Corporation stock in 2020, he would not be able to use the loss, the issue becomes when will the taxpayer receive basis for the PPP Loan forgiveness.  If the Loan is not forgiven until 2021, the basis increase does not occur until then resulting in  the taxpayer having a non-deductible loss in 2020.

The AICPA suggested to Treasury that the proper period under the Act for the inclusion of tax-exempt income is when the PPP borrower pays or incurs qualified expenses during the covered forgiveness period.   This reporting better matches the Basis adjustment with the qualified expenditures for the vast majority of PPP borrowers (given the fact that 99% of loan forgiveness applications have been granted).

There is some suggestion that loan forgiveness may be a “ministerial act” which would support the shareholder or receiving basis at the time expenditures are made.  Initially I.R.S. Notice 2020-32 ruled that taxpayers would not receive a tax deduction for expenses paid with PPP Loans. Thereafter, the Service doubled down on this position in Rev. Rul. 2020-27, which held that even if a PPP Loan had not been forgiven by the end of the year, and the taxpayer had paid expenses with the proceeds of the loan, if forgiveness of the PPP Loan was “reasonably expected” in the subsequent year, (even if a forgiveness application had not been submitted by the end of the current year), the taxpayer could still not deduct the expenditures in the year paid.  In other words, when the shoe is on the other foot, loan forgiveness related back to the point in time when the qualified expenditures were paid.  Also, query whether this is an issue for partnerships or LLC’s taxed as partnerships.  If qualified expenditures were made in 2020 creating a loss (as in the example of the Subchapter-S corporation above) but the PPP Loan was not forgiven until 2021, does the partner or member get basis for the PPP Loan as debt in 2020 under Code Section 752 and thus able to report the loss in 2020?  Or is the PPP Loan not a loan because it is “reasonably expected” to be forgiven?

To date, no further guidance has been forthcoming and so the issue is still there for taxpayers who otherwise have insufficient basis to deduct losses created from qualified expenditures made with the proceeds of the PPP Loan not forgiven by year end.  Unfortunately, to date there has not been a response to the request to Treasury for clarification, and the issue remains unresolved.

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