Passthrough entity owners should be adjusting the basis of their interests when the expenditures for forgivable loans are made without regard to when those loans are forgiven, according to the American Institute of CPAs.
A March 15 comment letter from the AICPA notes that while forgiven Paycheck Protection Program loans should create basis that partnership and S corporation owners can use to deduct losses, they need clarification for what happens if the loan is forgiven in a tax year after it is used to pay expenses.
“Over 5.2 million PPP loans were issued totaling over $525 billion, leaving 3.9 million borrowers that have not yet submitted applications for loan forgiveness, totaling approximately $354.5 billion,” according to the AICPA.
When the IRS retracted guidance about deduction of expenses paid with PPP loan proceeds in January, Alexander Scott of the AICPA mentioned the need for passthrough entity basis clarifications.
The AICPA letter illustrates the issue with a simple example: A single-owner S corporation takes out a $1 million loan in 2020, incurs a $1 million loss in the same year, and started the year with zero basis in the stock. Without a basis increase from the tax-exempt income of the loan forgiveness, the owner won’t be able to use the $1 million passthrough loss for 2020, the letter noted, adding that the owner needs to know when to take that basis increase if the PPP loan isn’t forgiven until 2021.
It isn’t just those who might request or receive forgiveness of still-outstanding loans but also fiscal-year taxpayers whose tax years may have ended before their PPP loans were forgiven that will need this answer, according to the AICPA.
Open the Ministry
“The AICPA recommends that Treasury and the IRS issue guidance stating that the proper period under the Code for the inclusion of the tax-exempt income due to Section 276 [of the Consolidated Appropriations Act, 2021 (P.L. 116-260)] is when the PPP borrower pays or incurs qualifying expenses during the covered forgiveness period,” the letter stated.
Timing the tax-exempt income basis adjustment to when taxpayers spend the PPP funds better matches income with expenditures for “the vast majority of PPP borrowers,” the AICPA argued.
The AICPA said that its recommendation should apply without regard to whether the taxpayer is on the cash or accrual method of accounting. The IRS and Treasury should also say that they won’t challenge a taxpayer’s characterization of the PPP loan forgiveness as a “ministerial act,” according to the letter.
The detail of the PPP loan forgiveness questionnaire has been making taxpayers nervous for a while, even though over 99 percent of requests have been granted, according to the AICPA.
It could be inferred from some of the IRS and Treasury guidance that the loan forgiveness should be treated as a ministerial act, but other inferences are possible, and the agencies had to reverse some of those documents because Congress countermanded them on deductibility of expenses paid with forgiven PPP loans, the letter noted. So taxpayers need to know where they stand, the AICPA argued.
Looking for More
The AICPA letter asked the IRS to treat expenses deducted and attributable to PPP loans as excluded from accumulated adjustment accounts and instead accounted for in other adjustment accounts under section 1368.
Finally, partnership and S corporation income tax returns both ask general questions about loan forgiveness, the letter noted. “The AICPA recommends that Treasury and the IRS issue immediate guidance on the proper reporting and expectation in answering these basis questions for passthrough entities that have, or will have, their PPP loans forgiven.”