Basis, That is the Question! If Not Now, When?
The Consolidated Appropriations Act of 2020 (CAA) provided clarification and delivered welcome news for owners of pass-thru entities (S corporations and LLCs/partnerships) who have taken advantage of the CARES Act Paycheck Protection Program (PPP) loans program and anticipate their loan will be forgiven.
As tax professionals, we are watching closely as this new legislation passes and realize there are several questions that must be addressed before your 2020 tax returns can be filed.
The question for owners of pass-through entities who received PPP loans is not if, but when they will receive basis increases resulting from the debt forgiveness! While this question needs to be answered for each pass-through entities’ tax return to be prepared, it is critical for those who have losses in 2020 and whose owners need a basis to deduct those losses.
The question goes to the timing of the basis increase.
Which of these points in time will the forgiveness become considered for income tax purposes, to be tax-exempt income, and thus increase basis?
- When the debt is forgiven by the lender?
- When the company records the forgiveness for financial reporting purposes?
- When the company applies for forgiveness with the lender?
- When, as discussed in IRS Rev. Rul. 2027-27 (which we expect to be discarded by the IRS) the company spends the monies on permissible expenses that they reasonably expect will lead to forgiveness?
- Will this differ for an accrual versus cash basis taxpayer?
For further details refer to the article we published on 12/20/20, Tax Implications of PPP Funds Finally Align with Congressional Intent.
The bottom line
The CAA specified that eligible expenses paid using PPP funds are fully deductible and stated that “no basis increase shall be denied, by reason of the exclusion from gross income,” meaning PPP forgiveness will INCREASE basis.
It is possible that the IRS may issue some guidance, in the form of either Q&As, Revenue Rulings, or subsequent Notices.
Aprio has established a dedicated PPP loan forgiveness team that is continuously monitoring new guidance from the SBA, as well as the Treasury, Congress and the IRS, to ensure we have the latest information when advising our clients.
As always, your Aprio team is here to support you and your company around PPP and PPP tax related matters. Connect with your Aprio advisor or schedule a meeting with us for more information on how we can help.