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including state and local taxes and em- and the other adjustments account
ployee compensation to shareholders, are (OAA) due to accumulated earnings and
deducted against nonseparately stated profits (AE&P). In Letter Ruling
items of income and pass through to the These matters were addressed in the 202110010,
shareholder(s) as net ordinary income revenue procedures issued in Novem- the IRS concluded
or loss. ber 2021.
Timing issues under the CAA: that the terms of the
Timing of PPP deductions and Before describing the revenue proce- operating agreement
effect on AAA, AE&P, and OAA dures in more detail, it may be helpful to
Issued Nov. 18, 2021, Rev. Procs. illustrate the timing issues arising under created a second
class of stock for
2021-48, 2021-49, and 2021-50 ad- the CAA.
dressed the timing treatment of tax- the S corporation.
exempt income and corresponding Example 1. Suspended loss carry-
basis inclusion from forgiven Paycheck overs: X, Y, and Z are each one-third
Protection Program (PPP) loans under shareholders in an S corporation. during 2020 to each shareholder. Z’s
the Consolidated Appropriations Act, Assume that the S corporation does share of the distributions exceeds
2021 (CAA).9 As background to under- not have AE&P from a C corpora- Z’s tax basis, triggering capital gain
standing these three revenue procedures, tion year. The three shareholders of $5,000. Because the $105,000
Section 276 of the COVID-related Tax differ in their beginning-of-the- operating loss (due to the deducted
Relief Act of 2020, enacted as part of year stock basis. The S corporation PPP expenditures) exceeds their
the CAA, provided that expenses paid borrows $105,000 from the PPP tax bases in the stock, the operat-
with forgiven PPP funds are deductible, program in 2020, spending it on ing loss allocated to Y and Z creates
that PPP borrowers are not to reduce qualified expenses. Otherwise, the S suspended loss carryovers of $20,000
any tax attributes, and that no basis corporation breaks even for the year. and $35,000, respectively, as shown
increase shall be denied by reason of the The PPP loan is forgiven in 2021. in the table “Suspended Loss
exclusion of PPP forgiveness from gross Distributions of $20,000 are paid Carryovers in Example 1.”
income. Section 276 also provided S cor-
poration and partnership PPP borrowers
instructions for the tax treatment of the Suspended loss carryovers in Example 1
amount excluded from gross income due
Shareholders
to PPP loan forgiveness.
Under the CAA, however, numerous
Total X Y Z
timing issues arose if the eligible PPP
expenses were deducted in year 1 and
Basis Jan. 1 2020 $95,000 $35,000 $15,000
the PPP loan was forgiven in year 2.
This mismatch created possible basis
Distributions $60,000 ($20,000) ($20,000) ($15,000)
and at-risk limitations, led to implica-
tions for buyers or sellers of S corpora-
Operating loss $105,000 ($35,000) ($15,000) -
tion interests in cases where the timing
of the basis inclusion could artificially
increase or decrease the taxable amount Basis Dec. 31 2020 $40,000 - -
and, in certain situations, produced a
Capital gain $5,00010
taxable dividend out of the S corpora-
tion due to the accounting treatment
Suspended loss $20,000 $35,000
of tax-exempt income between the ac-
cumulated adjustments account (AAA)

9. Consolidated Appropriations Act, 2021, P.L. 116-260. 10. Note, of the $20,000 distribution to Z, $15,000 reduces basis with the
remaining $5,000 treated as a capital gain.

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