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IRS Acknowledges the Latest Stimulus Legislation and its Effect on the PPP

On January 6, 2021, the IRS issued a revenue ruling that officially obsoletes (i.e., withdraws) its prior Notice and Revenue Ruling that disallowed deductions for expenses relating to loan forgiveness under a paycheck protection program (PPP) loan. In Rev. Rul. 2021-2, the IRS acknowledged the passage of the Consolidated Appropriations Act, 2021 and the fact that it legislatively overrode its prior position as announced in Notice 2020-32 and Rev. Rul. 2020-27. Thus, as a result of this ruling, the IRS now agrees that loan forgiveness is completely tax-free – no income inclusion and no expense disallowance. This is welcome news to the 5.2 million borrowers who obtained loans under the PPP.

Another area where advice from the IRS would be helpful is the timing of the basis increase to shareholders in an S corporation. Recall that even though tax-exempt income is not taxable to S corporation shareholders, they receive an increase in basis relating to the income. Such increase is important because it affects the shareholders future recognition of gain and loss from the S corporation. Shareholders in calendar-year S corporations would prefer the increase to occur in 2020, and that is clear in cases where loan forgiveness occurred in 2020. But for those calendar-year S corporations that either received a decision in 2021, or expect to, the timing of the increase in basis is unclear. Without guidance, shareholders in such corporations may have to wait until 2021, creating a mismatch between the income and the increase in basis. That is an unfair result and hopefully the IRS steps in to fix it, perhaps by relying on the reasoning in now obsolete Rev. Rul. 2020-27 – the ruling that disallowed expenses in 2020 as long as there was a reasonable expectation of forgiveness in 2020. Note that a similar issues exists for partners in partnerships.

Please refer to the following article here for prior insight on the PPP.

If you have questions relating to this revenue ruling, please reach out to your Withum tax advisor.

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