There has been a lot of confusion regarding the PPP loan forgiveness and its tax exemption. IRS recently set out guidance to remove any ambiguities that people might have about how the program works or on its tax exemption.
It is no surprise that the looming pandemic gave a major setback to almost every other country. It was the small businesses that suffered the most at the hands of Covid-19. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was introduced to help the financially stricken with the loan’s repayment by forgiving them the money that was spent on the eligible expenses.
Businesses or individuals who received the PPP loan forgiveness do not need to include the money they spent from the loan in their gross income when filing their taxes. The loan money spent will be exempt from taxes. However, the loan money would have to be included in the gross receipts as per certain federal tax provisions.
What’s the catch?
Previously there was no clarity as to when should the taxpayers add the spent loan money to their gross receipts. The recently announced Rev. Proc. 2021-48 & Rev. Proc. 2021-49 has set out guidelines as to when to include the loan money in the gross receipts and when to count it as tax-exempt money.
The same set of guidelines is also insightful in terms of providing crucial information to consolidated groups and partners regarding what part to exempt from the gross income.
Rev. Proc. 2021-48 stated that the tax-exempt income can be considered as received or accrued when the individual or the business applies for the PPP loan forgiveness, when the PPP loan forgiveness application is granted, and when the eligible expenses have been paid.
This then raises the question of disparity in terms of the figures between the income and expenses since not everyone made deductions in their expenses prior to the reversal of one term in the Tax Relief Act 2020 (addressing the deductions for the expenses paid with the forgiven loans).
For taxpayers (individuals and businesses) who did not reduce the deductions as per the recent change in the Tax Relief Act of 2020, there is still a workable leeway. The deductible amount will be compensated for in the next taxable year. So, there is no need to worry if you could not reduce the deductions on time.
In a nutshell, taxpayers will take a sigh of relief after reading the complete Rev. Proc. 2021-48. Individuals previously worrying about how to justify the disparity in income and expenses as well as intricacies of consolidated groups and partners can find on-point information addressing all of these queries.