S-corp basis and PPP loan forgiveness

[Rapid Robert]

In another thread, NYEA said:

When the loan is forgiven you have tax-free income which is a positive increase in basis to the shareholder(s).

https://forum.thetaxbook.com/forum/discussion-forums/main-forum-tax-discussion/304191-stimulus-and-taxation?p=304199#post304199

Now a colleague is suggesting "S corp income from discharge of indebtedness that is nontaxable does not increase basis. IRC Sec. 108(d)(7)" I took a quick look, and while I know I should spend an hour or more trying to understand all the cross-references, I'm wondering if this changes things for S-corps. The implication is that someday down the road, "This may mean that if basis does not rise by the loan amount upon forgiveness, when a distribution occurs that is greater than basis, cap gains might arise."

[New York Enrolled Agent]

In another thread, NYEA said:

https://forum.thetaxbook.com/forum/discussion-forums/main-forum-tax-discussion/304191-stimulus-and-taxation?p=304199#post304199

Now a colleague is suggesting "S corp income from discharge of indebtedness that is nontaxable does not increase basis. IRC Sec. 108(d)(7)" I took a quick look, and while I know I should spend an hour or more trying to understand all the cross-references, I'm wondering if this changes things for S-corps. The implication is that someday down the road, "This may mean that if basis does not rise by the loan amount upon forgiveness, when a distribution occurs that is greater than basis, cap gains might arise."

Your colleague should read the relevant law enacted in 2021 (the last adjustment to §108(d)(7) was in 2002)

From the Appropriations Bill ‘‘(i) TAX TREATMENT.—For purposes of the Internal Revenue Code of 1986

‘‘(1) no amount shall be included in the gross income of the eligible recipient by reason of forgiveness of indebtedness described in subsection (b), ‘
‘(2) no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided by paragraph (1),‘‘

(3) in the case of an eligible recipient that is a partnership or S corporation— ‘‘(A) any amount excluded from income by reason of paragraph (1) shall be treated as tax exempt income for purposes of sections 705 and 1366 of the Internal Revenue Code of 1986, and …

[ttbtaxes]

I believe the IRS position is there in no basis increase until the PPP loan has been forgiven. Therefore, if the loan was issued in 2020 and forgiven in 2021, it did not give rise to basis increase until 2021. The AICPA is obviously concerned about this issue as they wrote a letter to the IRS on March 15, 2021 requesting clarification and presenting the "Ministerial Act" position.

The AICPA would not be writing to the IRS that deep into tax season if they thought it was clear that basis increase occurs the year the loan is made rather than formally forgiven. I would be extending any individual returns of partners/shareholders with this issue to see if clarification comes.

https://www.aicpa.org/content/dam/ai...sis-issues.pdf

[BOB W]

Based on the AICPA letter, It sounds like the AICPA is pushing for forgiveness treatment in the year that the payroll and other qualified PPP expenses were paid. I have already, earlier in the tax season, treated some early clients as forgiven or will be forgiven as previously posted on this board. I have since stopped due RR and others have made it clear that it may be in error.

I am happy that I may not have been too far wrong but will still hold the remainder of S Corp returns,

[Rapid Robert]

Your colleague should read the relevant law enacted in 2021 (the last adjustment to §108(d)(7) was in 2002)

Thank you! Now that you posted it, I do recall reading this somewhere before, not sure if it was this forum or somewhere else.

To state the obvious, our tax code is ridiculously complicated, especially when it comes to temporary overrides to permanent provisions of the IRC buried in the middle of 5,600 pages of a hastily-passed law.