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Clarification of Tax Treatment of Forgiveness of Covered Loans

Posted by Admin Posted on Dec 28 2020

The Consolidated Appropriations Act, 2021 expands the Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, that provides loans (covered loan) to assist small businesses with certain expenses incurred during the economic challenges due to the COVID-19 emergency. The Consolidated Appropriations Act, 2021 also clarifies the deductibility of certain expenses paid for with funds from a loan under PPP and the tax impact on income for the forgiveness of the related debt.

 

The Consolidated Appropriations Act, 2021 clarifies that:

 

  • no amount is included in the gross income of the eligible recipient due to the debt forgiveness

 

  • no deduction is denied, no tax attribute is reduced, and no basis increase is denied because of the exclusion from gross income, and

 

  • in the case of an eligible recipient that is a partnership or S corporation—

 

  • any amount excluded from income is treated as tax exempt income, and in general, any increase in the adjusted basis of a partner’s interest in a partnership with respect to any amount excluded from income is equal to the partner’s distributive share of deductions resulting from costs giving rise to the forgiveness.

 

This clarification under the Consolidated Appropriations Act, 2021 is effective for tax years ending after March 27, 2020, the date of enactment for the CARES Act. This clarification also applies to any subsequent Payroll Protection Loans for tax years ending after the date of enactment of the Consolidated Appropriations Act, 2021.

 

The expanded list of eligible expense under the Consolidated Appropriations Act, 2021 includes:

 

  • payroll costs

 

  • certain healthcare benefits

 

  • interest on mortgage obligations

 

  • rent

 

  • utilities  

 

  • interest on any other debt obligations

 

  • operations expenses

 

  • property damage

 

  • supplier costs

 

  • worker protection expenses

 

The Consolidated Appropriations Act, 2021, also provides a simplified process for recipients of a covered loan of not more than $150,000 to apply for loan forgiveness.

 

Please call our office if you have any questions on covered loans under the Paycheck Protection Program and the expanded relief provided by the Consolidated Appropriations Act, 2021.