The IRS finally addressed the options for the timing of PPP forgiveness for tax purposes in Revenue Procedure 2021-48[1] as well as issuing two related procedures at the same time dealing with related issues. This includes a very limited time period when an affected BBB partnership can file an amended income tax return in lieu of filing the otherwise required Administrative Adjustment Request.

Timing of Income Inclusion

The procedure provides that a taxpayer may treat tax-exempt income as received or accrued from a PPP loan under any of the following three methods:

The tax-exempt income may be recognized as, and to the extent that, the taxpayer pays or incurs eligible expenses leading to forgiveness. Under this option, a taxpayer that has elected to use the safe harbor provided under Revenue Procedure 2021-20 will be treated as paying or incurring the eligible expenses during the taxpayer’s immediately subsequent taxable year following the taxpayer’s 2020 taxable year in which the expenses were actually paid or incurred, as described in Revenue Procedure 2021-20;
When the taxpayer files an application for forgiveness of the PPP Loan; or
When the PPP Loan forgiveness is granted.[2]

The Procedure describes Revenue Ruling 2021-20, noted above, as follows:

Revenue Procedure 2021-20, 2021-19 I.R.B. 1150 (May 10, 2021), provides a safe harbor that allows certain taxpayers that, under prior guidance issued by the Treasury Department and the Internal Revenue Service, did not deduct certain otherwise deductible PPP-related expenses on a tax return that was filed prior to the enactment of the COVID Tax Relief Act to deduct such expenses in the next taxable year (that is, the taxable year following the taxable year in which such expenses were paid or incurred).[3]

If PPP Loan is Not Fully Forgiven

The Revenue Procedure provides the following provisions that apply if, after using these methods, the PPP Loan is ultimately not fully forgiven:

Unless otherwise provided in the 2021 filing year form instructions, if the taxpayer receives forgiveness for an amount of the PPP Loan that is less than the amount that the taxpayer previously treated as tax-exempt income, the taxpayer must make appropriate adjustments on an amended Federal income tax return, information return or AAR, as applicable, for the taxable year(s) in which the taxpayer treated tax-exempt income from the forgiveness of such PPP Loan as received or accrued. Partners and shareholders that receive amended Forms K-1 as provided in this section 3.03 must file amended Federal income tax returns, information returns or AARs, as applicable, consistent with the Forms K-1 received.[4]

The Procedure requires that taxpayers who use these methods must apply them consistently for Federal income tax purposes:

To the extent tax-exempt income resulting from the partial or complete forgiveness of a PPP Loan is treated as gross receipts under a particular Federal tax provision, including but not limited to §§ 448(c) and 6033 of the Code, section 3 of this revenue procedure applies for purposes of determining the timing and, to the extent relevant, reporting of such gross receipts.[5]

IRS Instructions

The Procedure provides an assurance the IRS will provide instructions on how to report these items on 2021 returns, but taxpayers do not have to wait for the issuance of those 2021 instructions to begin using these procedures:

The IRS will publish form instructions for the 2021 filing season that will detail how taxpayers can report consistently with sections 3.01 through 3.03 of this revenue procedure. However, taxpayers do not need to wait until the instructions are published to apply this revenue procedure.[6]

Partnerships

Revenue Procedure 2021-49,[7] issued at the same time as Revenue Procedure 2021-48, provides guidance for partnerships regarding allocation of amounts excluded from gross income and deductions relating to PPP loan programs and certain other COVID relief programs. Specifically, the Procedure applies to:

A partnership that
- Received a PPP Loan; and
- Received partial or complete forgiveness of the PPP Loan such that, in accordance with § 7A(i) of the Small Business Act, or §§ 276(b) or 278(a)(1) of the COVID Tax Relief Act, as applicable, the forgiveness amount is not included in the gross income of the eligible recipient, entity, or borrower.
A partnership for which the SBA made payments with respect to a covered loan under § 1112(c) of the CARES Act.
A partnership that received an Emergency EIDL Grant, a Targeted EIDL Advance, or a Shuttered Venue Operator Grant.
A partnership that received a Supplemental Targeted EIDL Advance.
A partnership that received a Restaurant Revitalization Grant.[8]

The Procedure provides the following protection for partnerships that follow this procedure:

If a Covered Taxpayer that is a partnership satisfies all of the applicable requirements provided in section 4.02 of this revenue procedure, and complies with all information reporting requirements described in section 6 of this revenue procedure, the Internal Revenue Service (IRS) will treat the Covered Taxpayer’s allocation of amounts treated as tax exempt income and allocation of deductions described in section 4.02(1), (2), (3), or (4) of this revenue procedure (as the case may be) as determined in accordance with § 704(b) of the Code. Under § 705(a) of the Code, a partner’s basis in its interest is increased by the partner’s distributive share of tax exempt income and is decreased by the partner’s distributive share of deductions described in section 4.02(1), (2), (3), or (4) of this revenue procedure.[9]

PPP Loans

A qualifying partnership will satisfy the requirements of this Procedure with regard to PPP loans if all of the following conditions are met:

The allocation of deductions resulting from expenditures giving rise to the forgiveness of a PPP Loan is determined under § 1.704-1(b)(3), according to the partners' overall economic interests in the partnership.
The allocation of amounts treated as tax exempt income under § 7A(i) of the Small Business Act, § 276(b) of the COVID Tax Relief Act, or § 278(a) of the COVID Tax Relief Act, as applicable, is made in accordance with the allocation of the deductions described in section 4.02(1)(a) of this revenue procedure.
If any expenditure giving rise to the forgiveness of a PPP Loan is required to be capitalized under the Code (capitalized expenditure), the allocation of amounts treated as tax exempt income under § 7A(i) of the Small Business Act, § 276(b) of the COVID Tax Relief Act, or § 278(a) of the COVID Tax Relief Act, as applicable, is made in accordance with the allocation of the deemed loss, as provided in this section 4.02(1)(c), with respect to the capitalized expenditure's basis. Solely for purposes of this revenue procedure, the deemed loss with respect to the capitalized expenditure's basis is treated as a loss allowable as a deduction and is equal to the amount of loss that would be recognized if the property to which the capitalized expenditure relates were treated as disposed of in a fully taxable transaction for no consideration (hypothetical transaction) and, with respect to each partner, the allocation of the deemed loss associated with the capitalized expenditure's basis is determined under § 1.704-1(b)(3), according to the partners' overall economic interests in the partnership. The hypothetical transaction and resulting deemed loss are solely for purposes of determining the manner in which tax exempt income described in this section 4.02(1)(c) is allocated to the partnership's partners.[10]

Payments Made by the SBA for Covered Loans

A qualifying partnership will satisfy the requirements of this Procedure with regard to payments made by the SBA on applicable loans if all of the following conditions are met:

The allocation of deductions resulting from payments of interest and fees described in § 1112(c) of the CARES Act is determined under § 1.704-1(b)(3), according to the partners' overall economic interests in the partnership.
The allocation of amounts treated as tax exempt income under § 278(c) of the COVID Tax Relief Act attributable to interest and fees described in § 1112(c) of the CARES Act is made in accordance with the allocation of the deductions described in section 4.02(2)(a) of this revenue procedure.
The allocation of amounts treated as tax exempt income under § 278(c) of the COVID Tax Relief Act attributable to payments of principal described in § 1112(c) of the CARES Act is made in accordance with each partner's share of the liability under § 752 of the Code and the regulations thereunder.
If any expenditure related to the payment of interest and fees described in §1112(c) of the CARES Act is required to be treated as a capitalized expenditure, the allocation of amounts treated as tax exempt income under § 278(c) of the COVID Tax Relief Act is made in accordance with the allocation of the deemed loss, as described in section 4.02(1)(c) of this revenue procedure, with respect to the capitalized expenditure's basis. Upon the hypothetical transaction, the allocation of the deemed loss is determined under § 1.704-(1)(b)(3), according to the partners' overall economic interests in the partnership. The hypothetical transaction and resulting deemed loss are solely for purposes of determining the manner in which tax exempt income described in this section 4.02(2)(d) is allocated to the partnership's partners.[11]

Emergency EIDL Grant, Targeted EIDL Advance, or a Shuttered Venue Operator Grant

A qualifying partnership will satisfy the requirements of this Procedure with regard to Emergency EIDL Grants, Targeted EIDL Advances, or Shuttered Venue Operator Grants if all of the following conditions are met:

The allocation of deductions resulting from the expenditure of proceeds of an Emergency EIDL Grant, a Targeted EIDL Advance, or a Shuttered Venue Operator Grant is determined under § 1.704-1(b)(3), according to the partners' overall economic interests in the partnership.
The allocation of amounts treated as tax exempt income under § 278(b) and (d) of the COVID Tax Relief Act is made in accordance with the allocation of the deductions described in section 4.02(3)(a) of this revenue procedure.
If any expenditure paid with the proceeds from an Emergency EIDL Grant, a Targeted EIDL Advance, or a Shuttered Venue Operator Grant is required to be treated as a capitalized expenditure, the allocation of amounts treated as tax exempt income under § 278(b) and (d) of the COVID Tax Relief Act is made in accordance with the allocation of the deemed loss, as described in section 4.02(1)(c) of this revenue procedure, with respect to the capitalized expenditure's basis. Upon the hypothetical transaction, the allocation of the deemed loss is determined under § 1.704-(1)(b)(3), according to the partners' overall economic interests in the partnership. The hypothetical transaction and resulting deemed loss are solely for purposes of determining the manner in which tax exempt income described in this section 4.02(3)(c) is allocated to the partnership's partners.

Supplemental Targeted EIDL Advance or a Restaurant Revitalization Grant

A qualifying partnership will satisfy the requirements of this Procedure with regard to a Supplemental Targeted EIDL Advance or a Restaurant Revitalization Grant if all of the following conditions are met:

The allocation of deductions resulting from the expenditure of proceeds of a Supplemental Targeted EIDL Advance or a Restaurant Revitalization Grant is determined under § 1.704-1(b)(3), according to the partners' overall economic interests in the partnership.
The allocation of amounts treated as tax exempt income under §§ 9672 and 9673 of the ARP is made in accordance with the allocation of the deductions described in section 4.02(4)(a) of this revenue procedure.
If any expenditure paid with the proceeds from a Supplemental Targeted EIDL Advance or a Restaurant Revitalization Grant is required to be treated as a capitalized expenditure, the allocation of amounts treated as tax exempt income under §§ 9672 and 9673 of the ARP is made in accordance with the allocation of the deemed loss, as described in section 4.02(1)(c) of this revenue procedure, with respect to the capitalized expenditure's basis. Upon the hypothetical transaction, the allocation of the deemed loss is determined under § 1.704-(1)(b)(3), according to the partners' overall economic interests in the partnership. The hypothetical transaction and resulting deemed loss are solely for purposes of determining the manner in which tax exempt income described in this section 4.02(4)(c) is allocated to the partnership's partners.

Reporting Requirements

Revenue Procedure 2021-49 concludes by providing:

A Covered Taxpayer that is a partnership must report to the IRS all partnership items described in section 4 of this revenue procedure that the Commissioner of Internal Revenue or the Commissioner’s delegate may require in forms, instructions, or other guidance.[12]

Consolidated Groups

Revenue Procedure 2021-49 provides the following information for consolidated groups with regard to such COVID-related income exclusions:

With regard to a Covered Taxpayer that is a member of a consolidated group, the IRS will treat any amount excluded from gross income under § 7A(i) of the Small Business Act, § 276(b) of the COVID Tax Relief Act, or § 278(a)(1) of the COVID Tax Relief Act, as applicable, as tax exempt income for purposes of § 1.1502-32(b)(2)(ii). A Covered Taxpayer that is a member of a consolidated group may rely on the IRS treatment provided by this section 5 only if the consolidated group attaches a signed statement to its consolidated tax return indicating that all Covered Taxpayers in the consolidated group are relying on this section 5 and reporting consistently.[13]

Amended Returns

The Revenue Procedure 2021-48 provides the following information about amended tax returns related to these timing issues for recognizing PPP loan forgiveness:

Taxpayers may report tax-exempt income pursuant to section 3.01 on a timely filed original or amended Federal income tax return, information return or administrative adjustment request (AAR) under § 6227 of the Code.[14]

However, the Procedure notes that the IRS, at the same time as releasing Revenue Procedure 2021-48, also released Revenue Procedure 2021-50 which provides optional relief from the BBA Partnership Audit rules that would otherwise mandate the use of an AAR for a partnership that had not opted out of the BBA regime on their original returns:

See also Revenue Procedure 2021-50, 2021-49 I.R.B. ___, released November 18, 2021, allowing an eligible partnership to file an amended Form 1065, U.S. Return of Partnership Income, as an alternative to filing an AAR, and furnish a corresponding amended Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., to each of its partners. Partners and shareholders that receive amended Forms K-1 as provided in this section 3.02 must file amended Federal income tax returns, information returns or AARs, as applicable, consistent with the Forms K-1 received.[15]

Revenue Procedure 2021-50 provides the following option to file an amended return in lieu of an AAR request for a qualifying BBA partnership (note the very short time period to file this amended return):

BBA partnerships that filed a Form 1065 and furnished all required Schedules K-1 for taxable years ending after March 27, 2020 and did so prior to the issuance of this revenue procedure may file amended partnership returns and furnish corresponding amended Schedules K-1 on or before December 31, 2021(emphasis added). The amended returns must take into account tax changes under Rev. Proc. 2021-48 or Rev. Proc. 2021-49, but eligible BBA partnerships under section 3.03 of this revenue procedure may make any additional changes on their amended returns.[16]

These special rules are available only to BBA partnerships that filed Forms 1065 and furnished Schedules K-1 for the partnership taxable years ending after March 27, 2020 and prior to the issuance of Rev. Proc. 2021-48 or Rev. Proc. 2021-49 (November 18, 2021).

Additionally, to be eligible for the amended return filing and furnishing option, BBA partnerships must:

Be within the scope of section 3 of Rev. Proc. 2021-49 and meet the requirements of section 4.02(1), 4.02(2), 4.02(3), or 4.02(4) of Rev. Proc. 2021-49 by filing an amended Form 1065 in accordance with procedures in section 6 of Rev. Proc. 2021-49, or
Treat tax-exempt income resulting from the forgiveness of a PPP Loan, at a time described in section 3.01(1), (2) or (3) of Rev. Proc. 2021-48 by filing an amended Form 1065 in accordance with procedures in section 3.02 of Rev. Proc. 2021-48, as applicable.[17]

The Procedure provides that for purposes of the partner consistent reporting rules for BBA partnerships found at IRC §6222, “the amended return replaces any prior return (including any AAR filed by the partnership) for the taxable year for purposes of determining the partnership's treatment of partnership-related items.”

Eligible tax years for this special amended return procedure are “any partnership taxable year ending after March 27, 2020 and prior to the issuance of Rev. Proc. 2021-48 and Rev. Proc. 2021-49.”[18]

Filing an Amended Return in Lieu of an AAR

The Procedure provides the following method for filing amended returns in lieu of AARs for these purposes:

To take advantage of the option to file an amended return provided by section 3 of this revenue procedure, a BBA partnership must file a Form 1065 (with the “Amended Return” box checked) and furnish corresponding amended Schedules K-1 to its partners. The BBA partnership must clearly indicate the application of this revenue procedure on the amended return and write “FILED PURSUANT TO REV PROC 2021-50” at the top of the amended return and attach a statement with each amended Schedule K-1 furnished to its partners with the same notation. The BBA partnership may file electronically or by mail but filing electronically may allow for faster processing of the amended return. The BBA partnership filing an amended return pursuant to this revenue procedure should not include any forms that are normally only filed with an AAR, such as Form 8985, Pass-Through Statement-Transmittal/Partnership Adjustment Tracking Report (Required Under Sections 6226 and 6227) or Form 8986, Partner's Share of Adjustment(s) to Partnership-Related Item(s) (Required Under Sections 6226 and 6227).[19]

If the BBA partnership’s returns are under examination, the following provision applies:

If a BBA partnership is currently under examination for a taxable year ending after March 27, 2020, and wishes to take advantage of the option to file an amended return provided by section 3 of this revenue procedure, the partnership may only do so if the partnership sends notice in writing to the revenue agent coordinating the partnership's examination that the partnership seeks to use the amended return option described in this revenue procedure prior to or contemporaneously with filing the amended return as described in section 4.01 of this revenue procedure. The partnership must also provide the revenue agent with a copy of the amended return and amended Schedules K-1 upon filing.[20]

If the BBA partnership has previously filed an AAR for the same taxable year, the following guidance applies:

If a BBA partnership has previously filed an AAR and wishes to file an amended return pursuant to this revenue procedure for the same taxable year, the partnership should use the items as adjusted in the AAR, where applicable, in lieu of any reporting from the originally filed partnership return.[21]

If a passthrough-partner of the partnership filing an amended return in lieu of an AAR is itself also a BBA partnership, that partner can also file an amended return in lieu of an AAR but only for items included on the revised K-1 it received using the same procedures. The time limit to file an amended return of December 31, 2021 does not apply to this flow-through partner. These same relief rules apply to BBA partnerships that received an amended Schedule K-1 under any other previously issued revenue procedure allowing BBA partnerships to issue amended Schedules K-1.[22]

[1] Revenue Procedure 2021-48, November 18, 2021, https://www.taxnotes.com/research/federal/irs-guidance/revenue-procedures/irs-clarifies-when-to-claim-tax-exempt-ppp-forgiveness-amounts/7cm9r

[2] Revenue Procedure 2021-48, November 18, 2021

[3] Revenue Procedure 2021-48, November 18, 2021

[4] Revenue Procedure 2021-48, November 18, 2021

[5] Revenue Procedure 2021-48, November 18, 2021

[6] Revenue Procedure 2021-48, November 18, 2021

[7] Revenue Procedure 2021-49, November 18, 2021

[8] Revenue Procedure 2021-49, November 18, 2021

[9] Revenue Procedure 2021-49, November 18, 2021

[10] Revenue Procedure 2021-49, November 18, 2021

[11] Revenue Procedure 2021-49, November 18, 2021

[12] Revenue Procedure 2021-49, November 18, 2021

[13] Revenue Procedure 2021-49, November 18, 2021

[14] Revenue Procedure 2021-48, November 18, 2021

[15] Revenue Procedure 2021-48, November 18, 2021

[16] Revenue Procedure 2021-50, November 18, 2021, https://www.taxnotes.com/research/federal/irs-guidance/revenue-procedures/partnerships-pursuing-ppp-loan-forgiveness-benefits-may-amend-returns/7cm9q

[17] Revenue Procedure 2021-50, November 18, 2021

[18] Revenue Procedure 2021-50, November 18, 2021

[19] Revenue Procedure 2021-50, November 18, 2021

[20] Revenue Procedure 2021-50, November 18, 2021

[21] Revenue Procedure 2021-50, November 18, 2021

[22] Revenue Procedure 2021-50, November 18, 2021