Rev. Proc. 2021-49: Guidance for Partnerships and Consolidated Groups Regarding Amounts Excluded from Gross Income and Deductions Relating to the Paycheck Protection Program

Summary

Rev. Proc. 2021-49 gives partnerships and consolidated groups guidance on tax exempt income and deductions tied to forgiven Paycheck Protection Program (PPP) loans and other COVID-19 relief. It covers partnerships or consolidated-group members whose PPP Loan forgiveness is excluded from gross income, and partnerships that received an Emergency EIDL Grant, a Targeted or Supplemental Targeted EIDL Advance, a Shuttered Venue Operator Grant or a Restaurant Revitalization Grant. If the stated requirements and the section 6 information reporting are met, the IRS will treat a partnership's allocations of that tax exempt income and the related deductions as determined under § 704(b). A taxpayer may apply it for any taxable year ending after March 27, 2020; Rev. Proc. 2021-48 and Rev. Proc. 2021-50, released November 18, 2021, cover timing and amended partnership returns.

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Part III


Administrative, Procedural, and Miscellaneous



26 CFR 601.105: Examination of returns and claims for refund, credit or abatement;
determination of correct tax liability.
(Also Part I, §§ 704, 705, 1502; 1.1502-32.)




Rev. Proc. 2021-49



SECTION 1. PURPOSE


   .01 This revenue procedure provides guidance for partnerships and consolidated

groups regarding amounts excluded from gross income (tax exempt income) and

deductions relating to the Paycheck Protection Program (PPP) and certain other

COVID-19 relief programs. More specifically:

      (1) This revenue procedure provides guidance for partners and their partnerships

regarding:

           (a) allocations under § 704(b) of the Internal Revenue Code (Code) of tax

exempt income arising from the forgiveness of PPP Loans, the receipt of certain grant

proceeds, or the subsidized payment of certain principal, interest and fees;

           (b) allocations under § 704(b) of the Code of deductions resulting from
expenditures attributable to the use of forgiven PPP Loans or certain grant proceeds, or

subsidized payments of certain interest and fees; and

        (c) the corresponding adjustments to be made with respect to the partners’ bases

in their partnership interests under § 705 of the Code.

      (2) This revenue procedure also provides guidance under § 1502 of the Code and

§ 1.1502-32 of the Income Tax Regulations regarding the corresponding basis

adjustments for stock of subsidiary members of consolidated groups as a result of tax

exempt income arising from certain forgiven PPP Loans, grant proceeds, or subsidized

payment of certain principal, interest and fees.

   .02 For guidance on the timing of tax exempt income arising from forgiven PPP

Loans, see Rev. Proc. 2021-48, 2021-49 I.R.B. ___, released on November 18, 2021.

SECTION 2. BACKGROUND

   .01 CARES Act.

      (1) Overview. The PPP is a loan program administered by the U.S. Small

Business Administration (SBA) and the Administrator of the SBA (Administrator) as part

of the SBA’s “7(a) Loan Program” under § 7(a) of the Small Business Act (15 U.S.C.

§ 636(a)). 1 Congress established the PPP to assist small businesses nationwide

adversely affected by the COVID-19 emergency in paying payroll costs and other



1 See §§ 1102 and 1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act),

Public Law 116-136, 134 Stat. 281, 286-94, 297-301 (Mar. 27, 2020), as amended by §§ 2 and 3 of the
Paycheck Protection Program Flexibility Act of 2020, Public Law 116-142, 134 Stat. 641 (June 5, 2020);
the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) enacted
as Title III of Division N of the Consolidated Appropriations Act, 2021 (CAA), Public Law 116-220,
134 Stat. 1182 (Dec. 27, 2020); § 276 of the COVID-related Tax Relief Act of 2020 (COVID Tax Relief
Act), enacted as Subtitle B of Title II of Division N of the CAA; and the PPP Extension Act of 2021, Public
Law 117-6, 135 Stat. 250 (Mar. 30, 2021). Section 304(b)(1)(A) of the Economic Aid Act redesignated
§ 1106 of the CARES Act (15 U.S.C. § 9005) as § 7A and transferred redesignated § 7A to be inserted to
appear after § 7 of the Small Business Act (15 U.S.C. § 636).



                                                     2
eligible expenses. 2 Under the PPP, the Administrator may guarantee the full principal

amount of a “covered loan,” as defined in § 7(a)(36)(A)(ii) of the Small Business Act,

which for purposes of the PPP is a loan made under the PPP to an “eligible recipient,”

as defined in § 7(a)(36)(A)(iv) of the Small Business Act, during the period beginning on

February 15, 2020, and ending on May 31, 2021 (PPP First Draw Loan). 3 A PPP First

Draw Loan may be forgiven under § 7A of the Small Business Act.

      (2) Authorization of lenders to participate in PPP. Section 1109(b) of the CARES

Act allows the Department of the Treasury (Treasury Department), the Farm Credit

Administration, and other Federal financial regulatory agencies to authorize bank and

nonbank lenders, including insured credit unions, to participate in loans made under the

PPP and provide PPP loans under § 1109 (Section 1109 Loans). 4 Under

§ 1109(d)(2)(D) of the CARES Act, regulations establishing the terms and conditions of

Section 1109 Loans must provide for forgiveness of Section 1109 Loans under terms

and conditions that, to the maximum extent practicable, are consistent with the terms

and conditions for loan forgiveness of PPP First Draw Loans under § 1106 of the

CARES Act.

      (3) Emergency EIDL Grants. Section 1110(e) of the CARES Act allows an eligible

entity that applied for an Economic Injury Disaster Loan (EIDL) under § 7(b)(2) of the

Small Business Act (15 U.S.C. § 636(b)(2)) in response to COVID-19 to request that the

Administrator provide an advance that is not more than $10,000 (an Emergency EIDL



2 See Business Loan Program Temporary Changes; Paycheck Protection Program, 85 FR 20811

(Apr. 15, 2020).
3 See § 7(a)(2) of the Small Business Act and § 2 of the PPP Extension Act of 2021.

4 134 Stat., at 304-306.




                                                   3
Grant). An applicant is not required to repay any amount of an Emergency EIDL Grant,

even if the applicant is subsequently denied an EIDL under § 7(b)(2) of the Small

Business Act or a PPP loan under § 7(a) of the Small Business Act. See § 1110(e)(5)

of the CARES Act.

     (4) Principal and interest payments of covered loans. Section 1112(c) of the

CARES Act requires the Administrator to pay the principal, interest, and any associated

fees with respect to covered loans in regular servicing status made before the date of

enactment of the CARES Act, whether or not on deferment, and covered loans made

within six months after the enactment of the CARES Act. Covered loans under this

provision include loans:

       (a) guaranteed by the SBA under the 7(a) Loan Program (including Community

Advantage Loans but excluding PPP First Draw Loans) or under the 504 Loan Program

established under title V of the Small Business Investment Act of 1958 (15 U.S.C. § 695

et seq.), and

       (b) SBA microloan products made by an intermediary to certain small businesses

using loans or grants received under § 7(m) of the Small Business Act (15 U.S.C.

§ 636(m)).

   .02 Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act

     (1) PPP Second Draw Loans. Section 311 of the Economic Aid Act amended

§ 7(a) of the Small Business Act to authorize Paycheck Protection Program Second

Draw Loans (PPP Second Draw Loans) as covered loans under the same terms,

conditions, and processes as PPP First Draw Loans. See § 7(a)(37)(B) of the Small

Business Act (as added by § 311(a) of the Economic Aid Act). Congress authorized the




                                           4
PPP Second Draw Loans to further assist those small businesses nationwide that

continue to be adversely affected by the COVID-19 emergency. Similar to a PPP First

Draw Loan, the Administrator is permitted to guarantee the full principal amount of a

PPP Second Draw Loan made under the PPP to an “eligible entity,” as defined in

§ 7(a)(37)(A)(iv) of the Small Business Act, that has used or will use the full amount of a

PPP First Draw Loan on or before the expected date on which the subsequent loan is

disbursed to the eligible entity, and a PPP Second Draw Loan may be forgiven under

§ 7(a)(37)(J) of the Small Business Act (as added by § 311(a) of the Economic Aid Act).

An individual or entity that receives a PPP First Draw Loan, a PPP Second Draw Loan,

and/or a Section 1109 Loan, each a “PPP Loan” and collectively “PPP Loans,” may be

eligible to receive forgiveness of the principal amount of the PPP Loan up to an amount

(loan forgiveness amount) equal to the costs incurred and payments made during the

“covered period,” as defined in § 7A(a)(4) of the Small Business Act, for the following

“eligible expenses”: (1) payroll costs, (2) interest on a covered mortgage obligation,

(3) any covered rent obligation payment, (4) any covered utility payment, (5) covered

operations expenditures, (6) covered property damage costs, (7) covered supplier

costs, and (8) covered worker protection expenditures. 5 However, an individual or

entity’s loan forgiveness amount may be reduced under “PPP loan forgiveness

reduction rules” if the individual or entity experiences reductions in full-time equivalent

employees or employee salary and wages during the covered period and the individual

or entity does not qualify for any of the statutory or regulatory exemptions from the PPP




5 See § 7A(a) of the Small Business Act (as amended by § 304(b)(2) of the Economic Aid Act).




                                                  5
loan forgiveness reduction rules. 6

       (2) Shuttered Venue Operator Grants. Section 324(b) of the Economic Aid Act

authorizes the SBA to make initial and supplemental grants to certain “eligible persons

or entities,” which include live venue operators and promoters, theatrical producers, live

performing arts organization operators, museum operators, motion picture theater

operators, and talent representatives (Shuttered Venue Operator Grants). See § 324(a)

of the Economic Aid Act (defining the term “eligible person or entity”).

       (3) Extension of Emergency EIDL Grants program and Targeted EIDL Advances.

Section 331 of the Economic Aid Act extends the Emergency EIDL Grant program to

allow covered entities, as defined under paragraph (a)(2) of that section, to request to

receive a total of $10,000 under § 1110(e) of the CARES Act, without regard to whether

the covered entity’s EIDL under § 7(b)(2) of the Small Business Act is, or was, approved

or accepted and without regard to whether the covered entity received a PPP Loan

(Targeted EIDL Advances). The covered entity is not required to repay any amount of

the Emergency EIDL Grant, including the portion (if any) that comprises a Targeted

EIDL Advance. See § 1110(e) of the CARES Act; § 331(b)(2)(A) of the Economic Aid

Act.

   .03 COVID Tax Relief Act.

       (1) Forgiveness of PPP Loans.

        (a) Overview. Section 276(a) of the COVID Tax Relief Act amended § 7A(i) of

the Small Business Act (as redesignated, transferred, and inserted by § 304(b)(1)(A) of


6 See § 7A(d) of the Small Business Act (as amended by § 304(b)(2) of the Economic Aid Act) and

Business Loan Program Temporary Changes; Paycheck Protection Program – Loan Forgiveness
Requirements and Loan Review Procedures as Amended by Economic Aid Act, 86 F.R. 8290 (Feb. 5,
2021).



                                                  6
the Economic Aid Act) to provide guidance regarding the Federal income tax treatment

of the forgiveness of PPP First Draw Loans. Section 276(b) of the COVID Tax Relief

Act provides substantially similar guidance with regard to PPP Second Draw Loans, as

do § 278(a)(1) and (2) of the COVID Tax Relief Act with regard to Section 1109 Loans.

       (b) Federal income tax treatment. Specifically, § 7A(i) of the Small Business Act

and §§ 276(b) and 278(a)(1) and (2) of the COVID Tax Relief Act, as applicable, provide

that, generally for purposes of the Code, no amount is included in the gross income of

an eligible recipient or an eligible entity, as appropriate, by reason of the forgiveness of

a PPP Loan and no deduction is denied, no tax attribute is reduced, and no basis

increase is denied, by reason of such exclusion from gross income. Those sections

also provide that, for eligible recipients and eligible entities, as appropriate, that are

partnerships or S corporations, any amount excluded from gross income under § 7A(i)

of the Small Business Act or § 276(b) or § 278(a)(3) of the COVID Tax Relief Act, as

applicable, is treated as tax exempt income for purposes of §§ 705 and 1366 of the

Code. Section 7A(i) of the Small Business Act and §§ 276(b) and 278(a)(3) of the

COVID Tax Relief Act further provide that, except as provided by the Secretary of the

Treasury or her delegate (Secretary), any increase in the adjusted basis of a partner’s

interest in a partnership under § 705 of the Code with respect to amounts treated as tax

exempt income under § 7A(i) of the Small Business Act, § 276(b) of the COVID Tax

Relief Act, or § 278(a) of the COVID Tax Relief Act, as applicable, equals the partner’s

distributive share of deductions resulting from costs giving rise to the forgiveness of the

PPP Loans.

     (2) Emergency EIDL Grants and Targeted EIDL Advances. Section 278(b)(1)




                                               7
and (2) of the COVID Tax Relief Act provide that any Emergency EIDL Grant or

Targeted EIDL Advance is not included in the gross income of the person that receives

such advance or funding, and no deduction is denied, no tax attribute is reduced, and

no basis increase is denied, by reason of such exclusion from gross income.

Section 278(b)(3) of the COVID Tax Relief Act provides that, in the case of a

partnership or an S corporation that receives such advance or funding, any amount

excluded from gross income under § 278(b)(1) of the COVID Tax Relief Act is treated

as tax exempt income for purposes of §§ 705 and 1366 of the Code and that the

Secretary is to prescribe rules for determining a partner’s distributive share of any such

advance or funding for purposes of § 705 of the Code.

     (3) Subsidy for certain loan payments. Section 278(c)(1) and (2) of the COVID Tax

Relief Act provide that any payment described in § 1112(c) of the CARES Act is not

included in the gross income of the person on whose behalf such payment is made, and

no deduction is denied, no tax attribute is reduced, and no basis increase is denied, by

reason of such exclusion from gross income. Section 278(c)(3)(A) of the COVID Tax

Relief Act provides that, in the case of a partnership or S corporation on whose behalf a

payment described in § 1112(c) of the CARES Act is made, any amount excluded from

gross income under § 278(c)(1) of the COVID Tax Relief Act is treated as tax exempt

income for purposes of §§ 705 and 1366 of the Code. Section 278(c)(3)(B) of the

COVID Tax Relief Act provides that, except as provided by the Secretary, any increase

in the adjusted basis of a partner’s interest in a partnership under § 705 of the Code

with respect to any such payment equals the sum of the partner’s distributive share of

deductions resulting from interest and fees described in § 1112(c) of the CARES Act




                                             8
and the partner’s share, as determined under § 752 of the Code, of principal described

in § 1112(c) of the CARES Act.

     (4) Shuttered Venue Operator Grants. Section 278(d)(1) and (2) of the COVID Tax

Relief Act provide that any Shuttered Venue Operator Grant is not included in the gross

income of the person that receives such grant, and no deduction is denied, no tax

attribute is reduced, and no basis increase is denied, by reason of such exclusion from

gross income. Section 278(d)(3) of the COVID Tax Relief Act provides that, in the case

of a partnership or an S corporation that receives a Shuttered Venue Operator Grant,

any amount excluded from gross income under § 278(d)(1) of the COVID Tax Relief Act

is treated as tax exempt income for purposes of §§ 705 and 1366 of the Code, and the

Secretary is to prescribe rules for determining a partner’s distributive share of any such

grant for purposes of § 705 of the Code.

   .04 American Rescue Plan.

     (1) Supplemental Targeted EIDL Advances.

       (a) Overview. Section 5002(b)(2)(B) of the ARP requires the Administrator to

make additional Targeted EIDL Advances to covered entities that (1) have suffered an

economic loss of greater than 50 percent and (2) employ not more than 10 employees

(Supplemental Targeted EIDL Advances). The terms “covered entity” and “economic

loss” have the meanings given the terms in § 331(a) of the Economic Aid to Hard-Hit

Small Businesses, Nonprofits, and Venues Act. See § 5002(a)(2) of the ARP. The

amount of a Supplemental Targeted EIDL Advance equals $5,000, and is provided to a

covered entity in addition to any Emergency EIDL Grant or Targeted EIDL Advance that

the covered entity may have received.




                                             9
       (b) Federal income tax treatment. Section 9672(1) and (2) of the ARP provide

that any Supplemental Targeted EIDL Advance is not included in the gross income of

the person that receives such advance, and no deduction is denied, no tax attribute is

reduced, and no basis increase is denied, by reason of such exclusion from gross

income. Section 9672(3) of the ARP provides that, in the case of a partnership or an

S corporation that receives a Supplemental Targeted EIDL Advance, any amount

excluded from gross income under § 9672(1) of the ARP is treated as tax exempt

income for purposes of §§ 705 and 1366 of the Code, and the Secretary is to prescribe

rules for determining a partner’s distributive share of any such amount for purposes of

§ 705 of the Code.

     (2) Restaurant Revitalization Grants.

       (a) Overview. Section 5003(c) of the ARP requires the Administrator to make

grants (Restaurant Revitalization Grants) of up to $10 million in the aggregate

($5 million in the aggregate per location) to eligible entities (including restaurants, food

stands and food trucks, bars, and other similar establishments, but not including, among

other prohibited recipients, publicly traded companies or chains of 20 or more locations)

and affiliated businesses to cover pandemic-related revenue losses. See § 5003(a)(2),

(4), and (7) of the ARP (defining “affiliated business,” “eligible entity,” and “pandemic-

related revenue loss,” respectively). The amount of any Restaurant Revitalization Grant

is limited to the eligible entity’s pandemic-related revenue loss, as determined pursuant

to § 5003(a)(7) of the ARP and any guidance issued by the SBA, which is reduced by

any amounts received through a PPP First Draw Loan or a PPP Second Draw Loan in

2020 or 2021. See § 5003(c)(4)(B)(i) and (a)(7) of the ARP. In addition, any amount of




                                             10
a Restaurant Revitalization Grant made to an eligible entity based on estimated receipts

that is greater than the actual gross receipts of the eligible entity in 2020 must be

returned to the Treasury Department. See § 5003(c)(4)(B)(ii) of the ARP.

       (b) Return of Funds to the Treasury Department. If an eligible entity that receives

a Restaurant Revitalization Grant fails to use all grant funds or permanently ceases

operations on or before the last day of the covered period, the eligible entity must return

to the Treasury Department any funds that the eligible entity did not use for allowable

expenses. See § 5003(c)(6) of the ARP. Section 5003(c)(5) of the ARP describes

“allowable expenses” as including, among other expenses, payroll costs, payments of

principal or interest on any mortgage obligation, rent payments, utilities, maintenance

expenses, supplies, operational expenses, paid sick leave, and any other expenses that

the Administrator determines to be essential to maintaining the eligible entity. See

§ 5003(c)(5) of the ARP (enumerating permitted uses of funds made available through a

Restaurant Revitalization Grant). The covered period began on February 15, 2020, and

ends on December 31, 2021, or a date to be determined by the Administrator that is not

later than two years after the date of enactment of § 5003 of the ARP. See § 5003(a)(3)

of the ARP.

       (c) Federal income tax treatment. Section 9673(1) and (2) of the ARP provide

that any Restaurant Revitalization Grant received from the Administrator is not included

in the gross income of the person that receives such grant, and no deduction is denied,

no tax attribute is reduced, and no basis increase is denied, by reason of such exclusion

from gross income. Section 9673(3) of the ARP provides that, in the case of a

partnership or an S corporation that receives a Restaurant Revitalization Grant, except




                                             11
as otherwise provided by the Secretary, any amount excluded from gross income under

§ 9673(1) of the ARP is treated as tax exempt income for purposes of §§ 705 and 1366

of the Code, and the Secretary is to prescribe rules for determining a partner’s

distributive share of any such amount for purposes of § 705 of the Code.

   .05 Relevant Provisions under Subchapter K of the Code

     (1) Partner’s distributive share. Section 704(b) of the Code provides that a

partner's distributive share of income, gain, loss, deduction, or credit (or item thereof) is

determined in accordance with the partner's interest in the partnership (determined by

taking into account all facts and circumstances), if (1) the partnership agreement does

not provide as to the partner's distributive share of income, gain, loss, deduction, or

credit (or item thereof), or (2) the allocation to a partner under the agreement of income,

gain, loss, deduction, or credit (or item thereof) does not have substantial economic

effect. In order for an allocation to have economic effect, it must be consistent with the

underlying economic arrangement of the partners. This means in the event that there is

an economic benefit or economic burden that corresponds to an allocation, the partner

to whom the allocation is made must receive such economic benefit or bear such

economic burden. See § 1.704-1(b)(2)(ii)(a) of the Income Tax Regulations.

     (2) Determination of basis of partner’s interest. Section 705(a)(1) of the Code

provides that the adjusted basis of a partner's interest in a partnership is increased by

the sum of the partner’s distributive share for the taxable year and prior taxable years of

(A) taxable income of the partnership as determined under § 703(a) of the Code,

(B) income of the partnership exempt from tax under Title 26, and (C) the excess of the

deductions for depletion over the basis of the property subject to depletion. Under




                                             12
§ 705(a)(2) and (3) of the Code, a partner’s adjusted basis in a partnership interest is

decreased (but not below zero) by distributions by the partnership as provided in § 733

of the Code and by the sum of the partner’s distributive share for the taxable year and

prior taxable years of (A) losses of the partnership and (B) expenditures of the

partnership not deductible in computing its taxable income and not properly chargeable

to capital account; and decreased (but not below zero) by the amount of the partner’s

deduction for depletion for any partnership oil and gas property to the extent such

deduction does not exceed the proportionate share of the adjusted basis of such

property allocated to such partner under § 613A(c)(7)(D) of the Code.

   .06 Relevant Provisions under Subchapter S of the Code

     (1) Determination of S corporation shareholder’s Federal income tax liability.

Section 1366(a)(1) of the Code provides, in part, that, in determining the Federal

income tax of an S corporation shareholder under chapter 1 of the Code for the

shareholder’s taxable year in which the taxable year of the S corporation ends (or for

the final taxable year of a shareholder who dies, or of a trust or estate which terminates,

before the end of the S corporation’s taxable year), there is taken into account the

shareholder's pro rata share of the corporation’s--

       (a) items of income (including tax exempt income), loss, deduction (including

expenses related to tax exempt income, whether deductible or non-deductible), or credit

the separate treatment of which could affect the liability for tax of any shareholder; and

       (b) nonseparately computed income or loss.

     (2) Positive basis adjustments to stock of S corporation shareholders. Section

1367(a)(1) of the Code provides, in part, that the basis of each shareholder’s stock in an




                                            13
S corporation is increased for any period by the sum of the items of income described in

§ 1366(a)(1)(A) of the Code determined with respect to that shareholder for such period.

Consequently, amounts excluded from gross income under § 7A(i) of the Small

Business Act, § 276(b) of the COVID Tax Relief Act, and § 278(a) through (d) of the

COVID Tax Relief Act are taken into account in accordance with each S corporation

shareholder’s pro rata share under § 1366(a)(1)(A), and accordingly increase the basis

of the shareholder’s stock in the S corporation under § 1367(a)(1).

   .07 Relevant Provisions in the Consolidated Return Regulations

     (1) Tax exempt income. Section 1.1502-32(b)(2) provides for adjustments to the

basis in the stock of a member of a consolidated group (as defined in § 1.1502-1(h))

that is a subsidiary of one or more members (S), including positive adjustments for tax

exempt income. See § 1.1502-32(b)(2)(ii). S’s tax exempt income is defined as its

income and gain which is taken into account but permanently excluded from its gross

income under applicable law and which increases, directly or indirectly, the basis of its

assets (or an equivalent amount). Section 1.1502-32(b)(3)(ii)(A).

     (2) COD income. Section 1.1502-32(b)(3)(ii)(C)(1) provides that excluded

discharge-of-indebtedness income (that is, excluded COD income) is treated as tax

exempt income only to the extent the discharge is applied to reduce tax attributes

attributable to any member of the group under § 108 or § 1017 of the Code, or

§ 1.1502-28 (implementing § 108 in a consolidated group). As described in section 2.03

of this revenue procedure, § 7A(i) of the Small Business Act, and §§ 276(b) and

278(a)(1) and (2) of the COVID Tax Relief Act, as applicable, provide that no amount is

included in the gross income of a borrower by reason of forgiveness of a PPP Loan, and




                                            14
that no deduction is denied, no tax attribute is reduced, and no basis increase is denied,

by reason of such exclusion from gross income.

SECTION 3. SCOPE

   This revenue procedure applies to a taxpayer that is described in section 3.01, 3.02,

3.03, 3.04, or 3.05 of this revenue procedure (Covered Taxpayer).

   .01 A partnership or a member of a consolidated group that--

     (1) Received a PPP Loan; and

     (2) Received partial or complete forgiveness of the PPP Loan such that, in

accordance with § 7A(i) of the Small Business Act, or §§ 276(b) or 278(a)(1) of the

COVID Tax Relief Act, as applicable, the forgiveness amount is not included in the

gross income of the eligible recipient, entity, or borrower.

   .02 A partnership for which the SBA made payments with respect to a covered loan

under § 1112(c) of the CARES Act.

   .03 A partnership that received an Emergency EIDL Grant, a Targeted EIDL

Advance, or a Shuttered Venue Operator Grant.

   .04 A partnership that received a Supplemental Targeted EIDL Advance.

   .05 A partnership that received a Restaurant Revitalization Grant.

SECTION 4. ALLOCATION OF CERTAIN PARTNERSHIP ITEMS AND

PARTNERSHIP INTEREST BASIS ADJUSTMENTS

   .01 Treatment for Covered Taxpayers that are partnerships. If a Covered Taxpayer

that is a partnership satisfies all of the applicable requirements provided in section 4.02

of this revenue procedure, and complies with all information reporting requirements

described in section 6 of this revenue procedure, the Internal Revenue Service (IRS)




                                             15
will treat the Covered Taxpayer’s allocation of amounts treated as tax exempt income

and allocation of deductions described in section 4.02(1), (2), (3), or (4) of this revenue

procedure (as the case may be) as determined in accordance with § 704(b) of the

Code. Under § 705(a) of the Code, a partner's basis in its interest is increased by the

partner’s distributive share of tax exempt income and is decreased by the partner’s

distributive share of deductions described in section 4.02(1), (2), (3), or (4) of this

revenue procedure.

   .02 Requirements for Covered Taxpayers that are partnerships.

     (1) Requirements for the allocation of deductions and amounts treated as tax

exempt income arising in connection with the forgiveness of a PPP Loan. A Covered

Taxpayer that is a partnership satisfies the requirements of this section 4.02(1) if all of

the following conditions are met:

       (a) The allocation of deductions resulting from expenditures giving rise to the

forgiveness of a PPP Loan is determined under § 1.704-1(b)(3), according to the

partners' overall economic interests in the partnership.

       (b) The allocation of amounts treated as tax exempt income under § 7A(i) of the

Small Business Act, § 276(b) of the COVID Tax Relief Act, or § 278(a) of the COVID

Tax Relief Act, as applicable, is made in accordance with the allocation of the

deductions described in section 4.02(1)(a) of this revenue procedure.

       (c) If any expenditure giving rise to the forgiveness of a PPP Loan is required to

be capitalized under the Code (capitalized expenditure), the allocation of amounts

treated as tax exempt income under § 7A(i) of the Small Business Act, § 276(b) of the

COVID Tax Relief Act, or § 278(a) of the COVID Tax Relief Act, as applicable, is made




                                              16
in accordance with the allocation of the deemed loss, as provided in this section

4.02(1)(c), with respect to the capitalized expenditure’s basis. Solely for purposes of

this revenue procedure, the deemed loss with respect to the capitalized expenditure’s

basis is treated as a loss allowable as a deduction and is equal to the amount of loss

that would be recognized if the property to which the capitalized expenditure relates

were treated as disposed of in a fully taxable transaction for no consideration

(hypothetical transaction) and, with respect to each partner, the allocation of the

deemed loss associated with the capitalized expenditure’s basis is determined under

§ 1.704-1(b)(3), according to the partners' overall economic interests in the partnership.

The hypothetical transaction and resulting deemed loss are solely for purposes of

determining the manner in which tax exempt income described in this section 4.02(1)(c)

is allocated to the partnership’s partners.

     (2) Requirements for the allocation of deductions and amounts treated as tax

exempt income arising in connection with payments made by the SBA on behalf of the

taxpayer with respect to a covered loan under § 1112(c) of the CARES Act. A Covered

Taxpayer that is a partnership satisfies the requirements of this section 4.02(2) if all of

the following conditions are met:

       (a) The allocation of deductions resulting from payments of interest and fees

described in § 1112(c) of the CARES Act is determined under § 1.704-1(b)(3),

according to the partners' overall economic interests in the partnership.

       (b) The allocation of amounts treated as tax exempt income under § 278(c) of the

COVID Tax Relief Act attributable to interest and fees described in § 1112(c) of the

CARES Act is made in accordance with the allocation of the deductions described in




                                              17
section 4.02(2)(a) of this revenue procedure.

        (c) The allocation of amounts treated as tax exempt income under § 278(c) of the

COVID Tax Relief Act attributable to payments of principal described in § 1112(c) of the

CARES Act is made in accordance with each partner’s share of the liability under § 752

of the Code and the regulations thereunder.

       (d) If any expenditure related to the payment of interest and fees described in

§ 1112(c) of the CARES Act is required to be treated as a capitalized expenditure, the

allocation of amounts treated as tax exempt income under § 278(c) of the COVID Tax

Relief Act is made in accordance with the allocation of the deemed loss, as described in

section 4.02(1)(c) of this revenue procedure, with respect to the capitalized expenditure’s

basis. Upon the hypothetical transaction, the allocation of the deemed loss is

determined under § 1.704-(1)(b)(3), according to the partners' overall economic interests

in the partnership. The hypothetical transaction and resulting deemed loss are solely for

purposes of determining the manner in which tax exempt income described in this

section 4.02(2)(d) is allocated to the partnership’s partners.

      (3) Requirements for the allocation of deductions and amounts treated as tax

exempt income arising in connection with the taxpayer receiving an Emergency EIDL

Grant, Targeted EIDL Advance, or a Shuttered Venue Operator Grant. A Covered

Taxpayer that is a partnership satisfies the requirements of this section 4.02(3) if all of

the following conditions are met:

        (a) The allocation of deductions resulting from the expenditure of proceeds of an

Emergency EIDL Grant, a Targeted EIDL Advance, or a Shuttered Venue Operator

Grant is determined under § 1.704-1(b)(3), according to the partners' overall economic




                                             18
interests in the partnership.

       (b) The allocation of amounts treated as tax exempt income under § 278(b) and

(d) of the COVID Tax Relief Act is made in accordance with the allocation of the

deductions described in section 4.02(3)(a) of this revenue procedure.

       (c) If any expenditure paid with the proceeds from an Emergency EIDL Grant, a

Targeted EIDL Advance, or a Shuttered Venue Operator Grant is required to be treated

as a capitalized expenditure, the allocation of amounts treated as tax exempt income

under § 278(b) and (d) of the COVID Tax Relief Act is made in accordance with the

allocation of the deemed loss, as described in section 4.02(1)(c) of this revenue

procedure, with respect to the capitalized expenditure’s basis. Upon the hypothetical

transaction, the allocation of the deemed loss is determined under § 1.704-(1)(b)(3),

according to the partners' overall economic interests in the partnership. The

hypothetical transaction and resulting deemed loss are solely for purposes of

determining the manner in which tax exempt income described in this section 4.02(3)(c)

is allocated to the partnership’s partners.

     (4) Requirements for the allocation of deductions and amounts treated as tax

exempt income arising in connection with the taxpayer receiving a Supplemental

Targeted EIDL Advance or a Restaurant Revitalization Grant. A Covered Taxpayer that

is a partnership satisfies the requirements of this section 4.02(4) if all of the following

conditions are met:

       (a) The allocation of deductions resulting from the expenditure of proceeds of a

Supplemental Targeted EIDL Advance or a Restaurant Revitalization Grant is

determined under § 1.704-1(b)(3), according to the partners’ overall economic interests




                                              19
in the partnership.

        (b) The allocation of amounts treated as tax exempt income under §§ 9672 and

9673 of the ARP is made in accordance with the allocation of the deductions described

in section 4.02(4)(a) of this revenue procedure.

        (c) If any expenditure paid with the proceeds from a Supplemental Targeted

EIDL Advance or a Restaurant Revitalization Grant is required to be treated as a

capitalized expenditure, the allocation of amounts treated as tax exempt income under

§§ 9672 and 9673 of the ARP is made in accordance with the allocation of the deemed

loss, as described in section 4.02(1)(c) of this revenue procedure, with respect to the

capitalized expenditure’s basis. Upon the hypothetical transaction, the allocation of the

deemed loss is determined under § 1.704-(1)(b)(3), according to the partners’ overall

economic interests in the partnership. The hypothetical transaction and resulting

deemed loss are solely for purposes of determining the manner in which tax exempt

income described in this section 4.02(4)(c) is allocated to the partnership’s partners.

       .03 Amended Returns. If a taxpayer has filed an original or amended Federal

income tax return or information return, as applicable, for a taxable year ending after

March 27, 2020, the taxpayer may file an amended return or an administrative

adjustment request under § 6227 of the Code, as applicable, that reflects application of

this revenue procedure. See Rev. Proc. 2021-50, 2021-49 I.R.B.___, released

November 18, 2021, allowing eligible partnerships to file amended partnership returns

under this revenue procedure if the requirements of section 3 of Rev. Proc. 2021-50 are

met.

SECTION 5. STOCK BASIS ADJUSTMENTS REGARDING COVERED TAXPAYERS




                                            20
THAT ARE MEMBERS OF CONSOLIDATED GROUPS

   With regard to a Covered Taxpayer that is a member of a consolidated group, the

IRS will treat any amount excluded from gross income under § 7A(i) of the Small

Business Act, § 276(b) of the COVID Tax Relief Act, or § 278(a)(1) of the COVID Tax

Relief Act, as applicable, as tax exempt income for purposes of § 1.1502-32(b)(2)(ii). A

Covered Taxpayer that is a member of a consolidated group may rely on the IRS

treatment provided by this section 5 only if the consolidated group attaches a signed

statement to its consolidated tax return indicating that all Covered Taxpayers in the

consolidated group are relying on this section 5 and reporting consistently.

SECTION 6. INFORMATION REPORTING BY PARTNERSHIPS THAT ARE

COVERED TAXPAYERS

   A Covered Taxpayer that is a partnership must report to the IRS all partnership items

described in section 4 of this revenue procedure that the Commissioner of Internal

Revenue or the Commissioner’s delegate may require in forms, instructions, or other

guidance.

SECTION 7. EFFECTIVE DATE

   A taxpayer may apply this revenue procedure for any taxable year ending after

March 27, 2020.

SECTION 8. DRAFTING INFORMATION

   The principal authors of this revenue procedure are Katherine A. Waibler and

Michael R. Gould of the Office of Associate Chief Counsel (Passthroughs and Special

Industries). For further information regarding this revenue procedure, contact Katherine

A. Waibler at (202) 317-5056, and, regarding § 1.1502-32, Robert H. Liquerman at




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(202) 317-3181.




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