Tax Forgiveness of Covered Loans

Man using calculator Accounting Calculating Cost Economic bills with money stack step growing growth saving money in home , finance conceptThe Consolidated Appropriations Act (CAA), 2021 expands the Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, that provides covered loans to assist small businesses with certain expenses incurred during the economic challenges due to the COVID-19 pandemic. The CAA, 2021 also clarifies the deductibility of certain expenses paid for with funds from a PPP loan and the tax impact on income for the forgiveness of the related debt.

Debt Forgiveness Clarification

The CAA, 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,
  • in the case of an eligible recipient that is a partnership or S corporation, and
  • 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 CAA, 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 CAA, 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

This legislation also provides a simplified process for recipients of a covered loan of not more than $150,000 to apply for loan forgiveness.

Connect With a Tax Advisor

Connect with our team if you have any questions on covered loans under the Paycheck Protection Program or questions regarding the additional relief provided by the CAA, 2021. Learn more about how changes included in this recent legislation may affect your tax strategy by visiting our blog page.