Last month, IRS answered some important questions about Paycheck security loans.

Unfortunately, the S Corporation is the borrower and they have raised an important issue as to which equity account is to be adjusted.

Still, let us be positive. Most small businesses in the US are legal entities. This may include a partnership or S corporation.

If the money is used for legal purposes, PPP loans are eligible for pardon. Authorized expenses are usually deductible if they are paid by the taxpayer.

The original law made it clear that if the PPP loan was forgiven, it would not pay the debtor any money. He did not elaborate on the tax treatment of these loans.

For the most part, by 2020, IRS said no deductions could be made for PPP-supported expenses. This was for a variety of reasons (offered by the IRS three), but the IRS approach seemed difficult to compare with the benefits that Congress was trying to provide.

A.D. By the end of 2020, Congress has amended the law to make it clear that PPP-funded spending could be reduced. It is also said that an unforgiving income will increase the borrower’s base of income.

Tax base adjustments may be needed to reduce costs during the paid year. When the costs were paid within a year and the next time the loan was forgiven, questions arose about the treatment.

The “normal” tax law does not allow the base to increase until next year (the actual pardon year). This could result in a deduction for one year due to lack of foundation.

Under the 2021-48 revenue system, IRS said tax-free income, which includes the base, would be allowed one to three times. The taxpayer can choose.

First, when eligible expenses are paid or accumulated. Second debt when the borrower apologizes for the loan. Third, when he receives a debt forgiveness.

For taxpayers who return before the new policy, the IRS will make adjustments to the revised return. This usually includes improvements to the burden of the partnership.

If your business receives a PPP loan by 2020 and asks for a waiver at least by 2020, your taxpayer can contact you about the modified file. Some editors have followed the IRS approach before it was announced.

Partners are generally allowed to allocate revenue and reduce it by agreement of the partners. S corporations do not have this flexibility.

To be respected, partnership appointments must have “economic impact.” Treasury regulations have a valid language that can be included in a partnership agreement and guarantee that the IRS will comply.

In the absence of a control language, the assignment must follow each “partner’s interest.” This is called a “PIP” and is conditional. The result can be tangible.

The definition of “in baseball” of partner assignments is just one test. That is, if the control language is in the agreement, the assignment follows PIP.

If you do not complete the language test, there is no PIP test. Although the rules do not make the point clear, this is a good thing between partners and taxpayers.

Under the 2021-49 revenue system, the IRS said PPP-funded expenses should be allocated using the PIP test. This statement does not explicitly recognize the possibility of relying on the correct language in the agreement.

However, unless the agreement is designed to participate in the Tomfolery, the language of the agreement must follow PIP. The tax-free income and the basic adjustment are the same as the deductible for expenses.

In some cases, all or part of the PPP-supported expenses may need to be capitalized for tax purposes. This means that there will be no deductions now.

Without timely deductions, there is no link to link tax-free income to pre-deductions. Therefore, the IRS system law is to estimate the “approximate” reduction for capital goods.

Free income distribution and base adjustment, followed by hypothetical allocation for capital expenditures.

Jim Hamil is the director of tax practice at Reynolds, Hicks and Company in Albuquerque. It can be reached at jimhamill@rhcocpa.com.