Most Americans have a lot to be thankful for this year.
The economy is doing well, jobs are plentiful, and most small businesses are doing much better than expected.
Things were much worse in 2020, when the coronavirus closed thousands of businesses, stripping them of sales revenue, while spending remained stagnant.
The PPP program provided nearly $800 billion of forgivable loans to small businesses that enabled them to meet payroll, rent and other expenses, which were tracked and coordinated so that the loan would be forgiven if handled properly. .
Congress’s leniency extended to tax treatment by providing in the Consolidated Appropriations Act of 2021 that forgiveness of PPP loans does not constitute taxable income, and that expenses paid with borrowed money will still be tax deductible. .
This resulted in thousands of small businesses that were treated as S corporations or partnerships for federal tax purposes, but were challenged by loss limit rules, which prevented S corporation shareholders from recognizing the loss if their Didn’t have enough base. Stores.
For example, if the owners of an S corporation began the year 2020 with an income tax base of $50,000 in a corporate bank account and $50,000 in their stock, and had $125,000 in revenue from sales, the PPP was $50,000 of loan proceeds, and this Spent $200,000 on it. deductible expenses, then the company lost $75,000. Under S corporation loss limitation rules, losses are only allowed to the extent of the basis, so owners can only recognize a loss of $50,000 (based on $50,000 in stockholders’ stock), plus an additional $25,000 of loss. Recognition will be given if the shareholders have sufficient grounds.
It was assumed that the PPP loan was not waived in the year 2020, and cannot be forgiven, as the base is extended to the extent of tax-free income received through PPP loan waiver.
Therefore, if the S corporation in the above example had a debt forgiveness of at least $25,000 in 2020, shareholders could take their losses.
Alternatively, if the loan was considered for waiver in the year 2021, the losses in 2020 would be disallowed and carried over to 2021 against the company’s 2021 earnings.
Many shareholders were better off incurring losses in 2020, because of the more liberalized Net Operating Loss (NOL) rules that came into force in 2020 under the CARES Act, allowing a taxpayer to offset up to 100% of income with NOL, and Also take back the NOL for five years to get a refund from the tax paid in the previous years. In 2021, NOL can only offset 80% of income, and it is not refundable.
The question of when loans can be forgiven for purposes of providing a tax base remained unanswered until November 18, 2021, when the IRS issued Revenue Process 2021-48.
It provides that a taxpayer can treat tax-free income as “received or earned” as a result of PPP loan waiver, when the taxpayer can choose any of the following three options:
- when the qualified expenses were actually incurred (aka “paid or expended” by our tax nerds);
- When the taxpayer files his PPP waiver application; Or
- When forgiven
As a result, the vast majority of PPP borrowers who got their first loan and spent the first penny on expenses can now choose whether they want to deduct spending on their 2020 tax return, if they haven’t already, or Return to 2021 to the extent that their Aadhaar did not allow for deduction of expenses in 2020, even if they applied for waiver in 2021 or did not receive confirmation of waiver by 2021.
The Revenue Process also provides guidance for taxpayers who did not receive forgiveness in an amount equal to what is considered tax-exempt income in a prior year, and states that such taxpayers should be “on an amended federal income tax return.” Appropriate adjustments” should be made. Information Refund or Administrative Adjustment Request (AAR) for the prior year”.
Returning to the original example above, in the event that the company only received a $10,000 forgiven, the company would need to amend its 2020 income tax return to show that only $6,000 of the $75,000 loss is recognized. will be granted, and the remaining $15,000 will be carried over. In future tax years when the company has sufficient basis.
While it may seem like a no-brainer that the expense was paid as soon as possible to consider forgiveness, in some situations taxpayers may be better served by treating the forgiveness as such until it actually is. Happened. While there is a safe harbor that provides that PPP loan forgiveness is not considered “gross receipts” for the purposes of employee retention credit testing, it is considered “gross receipts” for other purposes under the Internal Revenue Code. Therefore, if a taxpayer would be pushed over the limit measured on “gross receipts”, such as in a situation where the amount of gross receipts would cause the taxpayer to switch from cash or accrual method of accounting, it would make sense to push. May come in the “receipt” by the next tax year.
The process mentions that the IRS will provide further instructions for the 2021 filing season on how taxpayers will consistently report with the process, so there will be more to come, but for now this latest guidance includes the IRS’s generosity to taxpayers. thanks to.
I covered the change in the Employee Retention Credit (ERC) in an earlier post titled The Death of the Fourth Quarter Employee Retention Credit. As always, I thank Brandon Ketron, CPA, JD, LL.M. To those who have helped with this article, and to the many readers who ask good questions and use this information to help others.