shot of cash in cornucopia
Most Individuals have rather a lot to be glad about this yr.
The economic system is doing nicely, jobs are plentiful, and most small companies are doing a lot better than had been anticipated.
Issues had been a lot worse within the yr 2020, when the Coronavirus shut down 1000’s of companies, and disadvantaged them of gross sales revenues, whereas bills stayed fixed.
The PPP program offered virtually $800 billion of forgivable loans to small companies that enabled them to satisfy payroll, lease, and different bills, which had been tracked and coordinated in order that the mortgage could be forgiven if correctly dealt with.
The generosity of Congress prolonged to tax therapy, by offering within the Consolidated Appropriations Act of 2021 that the forgiveness of the PPP loans didn’t represent taxable revenue and that the bills paid with the borrowed monies would nonetheless be tax-deductible.
As the results of this 1000’s of small companies which can be handled as S firms or partnerships for federal tax functions had important losses, however had been challenged by loss limitation guidelines which prevented S company shareholders from recognizing a loss if they didn’t have enough foundation of their inventory.
For instance, if the homeowners of an S company began the yr 2020 with $50,000 within the company checking account and an revenue tax foundation of $50,000 of their inventory, and had $125,000 of revenues from gross sales, $50,000 of PPP mortgage proceeds, and spent $200,000 on deductible bills, then the corporate had a $75,000 loss. Below the S company loss limitation guidelines, a loss is simply allowed to the extent of foundation, subsequently the homeowners may solely acknowledge $50,000 of the loss (primarily based upon the shareholders having a $50,000 foundation of their inventory), and the surplus $25,000 loss is carried over to be acknowledged when the shareholders have enough foundation.
This assumed that the PPP mortgage was not forgiven within the yr 2020, and couldn’t be thought-about to be forgiven, as foundation is elevated to the extent of tax-exempt revenue acquired through PPP mortgage forgiveness.
Subsequently, if the S company within the above instance had at the least $25,000 of mortgage forgiveness in 2020 then the shareholders may take their losses.
Alternatively, if the mortgage was thought-about to be forgiven within the yr 2021 then the losses could be disallowed in 2020 and carried over to 2021 to be offset towards 2021 revenue of the corporate.
Many shareholders had been higher off taking the losses within the yr 2020, due to the extra liberalized Web Working Loss (NOL) guidelines that utilized in 2020 below the CARES Act, whereby a taxpayer may offset as much as 100% of revenue with NOLs, and likewise carry again a NOL for as much as 5 years to obtain a refund from tax paid in prior years. In 2021, NOLs can solely offset 80% of revenue, and might not be carried again.
The query of when a mortgage could be thought-about to be forgiven for the needs of offering tax foundation remained unanswered till November 18, 2021 when the IRS launched Income Process 2021-48.
It gives {that a} taxpayer could deal with the tax exempt revenue because of PPP mortgage forgiveness as “acquired or accrued” on the time that any of the next three choices occurred that the taxpayer could select from:
- When Eligible Bills had been really spent (aka “paid or incurred” by us tax nerds);
- When the taxpayer information its PPP forgiveness software; or
- When the forgiveness occurred.
As the results of this the overwhelming majority of PPP debtors who acquired their first mortgage and spent the primary cash on bills can now select whether or not they wish to deduct the bills on the 2020 tax return, if they didn’t already, or on the 2021 return to the extent that their foundation didn’t allow the deduction of the bills in 2020 even when they utilized for forgiveness in 2021 or didn’t obtain affirmation of forgiveness till 2021.
The Income Process additionally gives steering for the taxpayer who doesn’t obtain forgiveness in an quantity equal to the quantity handled as tax-exempt revenue in a previous yr, and states that such taxpayers should make “acceptable changes on an amended Federal revenue tax return, data return or Administrative Adjustment Request (AAR)” for the prior yr.
Returning to the unique instance above, within the occasion that the corporate solely acquired forgiveness of $10,000 the corporate could be required to amend its 2020 revenue tax return to indicate that solely $60,000 of the $75,000 loss could be acknowledged, and the remaining $15,000 could be carried over to future tax years for use when the corporate has enough foundation.
Whereas it could look like a no brainer to think about forgiveness to have occurred as early as doable as bills had been paid, in some conditions taxpayers may very well be higher served by treating forgiveness as having not occurred till it really occurred. Whereas there’s a protected harbor that gives that PPP mortgage forgiveness isn’t thought-about as “gross receipts” for functions of the Worker Retention Credit score testing, it’s thought-about as “gross receipts” for different functions below the Inner Income Code. Subsequently, if a taxpayer could be pushed over a threshold measured on “gross receipts”, akin to a scenario the place the quantity of gross receipts would trigger the taxpayer to alter from the money or accrual methodology of accounting, it may make sense to push the “receipt” till the next tax yr.
The Process mentions that the IRS will likely be offering additional directions for the 2021 submitting season to element how taxpayers will report persistently with the Process, so there will likely be extra to return, however for now thank taxpayers for the IRS’s generosity on this newest steering.
I lined adjustments to the Worker Retention Credit score (ERC) in an earlier submit titled The Dying Of The Fourth Quarter Worker Retention Credit score. As all the time, I thank Brandon Ketron, CPA, JD, LL.M. who has assisted with this text, and for the numerous readers who ask good questions and use this data to assist others.