Late into the night on December 21, 2020, Congress—on page 2004 of 5593 total pages of the Consolidated Appropriations Act, 2021—clarified Sec 276: Clarification of Tax Treatment of Forgiveness of PPP Loans.
In general, Congress amended Subsection (i) of section 7A of the Small Business Act, and amended by the Economic Aid to read as follows:
‘‘Tax Treatment (of PPP)—For purposes of the Internal 13 Revenue Code of 1986…no amount shall be included in the gross income of the eligible recipient by reason of forgiveness of indebtedness…no deduction shall be denied, no tax attributed shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income”.
In summary: You do not treat PPP Forgiveness as Other Income, as the IRS previously stated was required, and you are allowed to take all of your deductions helping lower your taxable income.
The IRS further clarified, for Partnerships and S-Corps that: “in the case of an eligible recipient that is a partnership or S corporation…any amount excluded from income by reason (above) shall be treated as tax exempt income for purposes of sections 705 and 1366 of the Internal Revenue Code of 1986…”.
In summary: Congress is saying your basis is not affected by forgiving PPP money. Which means any PPP Forgiveness does not affect your taxable ownership. Another positive clarification from Congress for small business owners.