Paycheck Protection Program (PPP) loans have caused a myriad of confusion for tax practitioners, with previous IRS guidance leading to even more complexity and uncertainty. The law that authorized PPP loans mandated that their forgiveness was non-taxable. Next, the IRS proposed that expenditures paid with PPP loans were non-deductible. Subsequent legislation then made it clear that those expenditures were deductible. Ambiguity resulting from these conflicting statements led to questions, including when did forgiveness occur? Was it when the taxpayer received the forgiveness letter from the bank? Was it when the taxpayer submitted its request for forgiveness, or was it when the taxpayer spent the money as directed by the PPP directives?
The timing of actual forgiveness was even more important to flow-through entities because the recognition of the tax-exempt income increased the basis of the stakeholders in their respective partner capital accounts or shareholder stock. Without this basis, increase deductions might not be deductible, or distributions might become taxable.
To add clarity, the IRS has recently issued three revenue procedures that provide guidance addressing these timing issues, partner basis adjustments and filing of amended partnership returns and information statements.