Here’s what HIVE AI had to say about “How do I treat PPP loan forgiveness?”:
PPP loan forgiveness: tax treatment and reporting
Overview
- Qualifying forgiveness of a Paycheck Protection Program (PPP) loan is excluded from gross income; it creates tax‑exempt income rather than taxable cancellation‑of‑debt income. If forgiveness was improper (you didn’t meet eligibility or use-of-funds requirements), the exclusion does not apply and the forgiven amount is taxable. 1
When forgiveness is tax‑exempt
- Congress provided an express exclusion for properly forgiven PPP loans, so you do not include the forgiven amount in income. The IRS confirms that PPP forgiveness “creates tax‑exempt income.” 2
When forgiveness is taxable (improper forgiveness)
- If a loan was forgiven but you did not factually satisfy PPP forgiveness conditions (for example, ineligible borrower, misuse of funds, or other disqualifying facts), you cannot use the PPP exclusion. The forgiven amount must be included in gross income. The IRS has publicly advised that “improperly forgiven” PPP loans are taxable. 1
When to recognize the tax‑exempt income
- You can choose one of three timing methods to treat the PPP tax‑exempt income:
- As and to the extent you paid or incurred eligible expenses,
- When you filed the forgiveness application, or
- When forgiveness was granted.
You may report this on an original or amended return. 3
What to file or attach (statement requirement)
- If you apply the timing options above, attach a statement to your return titled “RP 2021‑48” identifying:
- Your name/address/SSN or EIN,
- Which section of Rev. Proc. 2021‑48 you’re applying (3.01(1), (2), or (3)) and for which tax year,
- The amount of tax‑exempt PPP income and for which tax year, and
- Whether forgiveness has been granted as of the filing date. 2
If forgiveness was less than expected after you recognized income early
- If you treated PPP tax‑exempt income earlier (using the timing options) and the final forgiven amount is lower, you must adjust in the year you learn forgiveness was not fully granted:
- C corporations: decrease tax‑exempt income on Schedule M‑2, line 6, and attach a statement referencing Rev. Proc. 2021‑48 §3.03 with the original year/amount and the adjusted amount. 4
- Partnerships: file an amended return or AAR for the year you originally reported the income, and attach a statement referencing Rev. Proc. 2021‑48 §3.03 with the same details. 5
Coordination with the Employee Retention Credit (ERC)
- No double benefit: wages used as “payroll costs” to obtain PPP forgiveness cannot also be treated as qualified wages for ERC. If you reported wages to support PPP forgiveness, you are deemed to have elected not to use those same wages for ERC up to the minimum needed for forgiveness. 6
- The statute bars ERC on wages taken into account for PPP forgiveness; Treasury guidance provides relief so that, if a PPP loan is not forgiven, those wages are not disqualified from ERC. 7
Special note for exempt organizations
- Forgiven PPP amounts may be reported as contributions from a governmental unit in the tax year of forgiveness—or at another time consistent with Rev. Proc. 2021‑48. 8
Recordkeeping and audit readiness
- Keep your PPP forgiveness application, SBA correspondence, and detailed payroll/expense records. To substantiate ERC coordination, retain calculations and documentation showing that wages used for PPP forgiveness were excluded from ERC wages, as highlighted in IRS ERC FAQs. 9
Common pitfalls to avoid
- Treating an improperly forgiven loan as tax‑exempt. If SBA later determines forgiveness was not “qualifying,” the amount becomes taxable and may be subject to enforcement. 1
- Failing to attach the “RP 2021‑48” statement when you adopt a timing method other than “when forgiveness is granted.” 2
Practical filing tips
- Sole proprietors and SMLLCs report nothing as income for properly forgiven PPP amounts, but still attach the “RP 2021‑48” statement if applicable. 2
- Partnerships and S corporations should ensure K‑1 tax‑exempt income and basis items reflect PPP tax‑exempt income consistent with their chosen timing method and make §3.03 adjustments if forgiveness is reduced. 5
Sources
1 – CCA 202237010 📄 Summarize
2 – IRS – Publication 525 Taxable and Nontaxable Income 📄 Summarize
3 – Rev. Proc. 2021-48 📄 Summarize
4 – IRS – Instruction 1120 Instructions for Form 1120, U.S. Corporation Income Tax Return 📄 Summarize
5 – IRS – Instruction 1065 Instructions for Form 1065, U.S. Return of Partnership Income 📄 Summarize
6 – Notice 2021-20 📄 Summarize
7 – IRC § 3134(h) 📄 Summarize
8 – IRS.gov – Instructions for Schedule A (Form 990) (2024) 📄 Summarize
9 – IRS.gov – Frequently asked questions about the Employee Retention Credit 📄 Summarize
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