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Are COVID-19 Benefits Taxable?
The Consolidated Appropriations Act, 2021 clarified the tax treatment of the following COVID-19 benefits:
Economic Injury Disaster Loan (EIDL) advances/grants,
Paycheck Protection Program (PPP) loan forgiveness,
Emergency financial aid grants,
CARES Act subsidies for certain loan payments, and
Shuttered venue operator grants.
For each of the above benefits:
A taxpayer excludes them from gross income,
A taxpayer loses no deductions or other tax attributes due to the exclusion, and
The exclusion amount increases basis for partnership and S corporation owners based on the owner’s share of the excluded income.
For federal tax purposes, a taxpayer generally has income realization (and the corresponding basis increase from the exclusion) at the time the taxpayer has an undeniable accession to wealth over which the taxpayer has complete dominion. See Comm. v. Glenshaw Glass Co., 348 U.S. 426 (1955). For PPP loan forgiveness, this is at the time the loan is actually forgiven, and not before, even if accelerating the basis increase would help the taxpayer avoid lack of basis issues.
With regard to the timing of debt forgiveness, in Kleber v. Comm., T.C. Memo 2011-233, citing Cozzi v. Comm., 88 T.C. 435, 445 (1987), the Tax Court said:
“The moment it becomes clear that a debt will never be repaid, that debt must be viewed as having been discharged… The determination of whether discharge of indebtedness has occurred is fact specific and often turns on the subjective intent of the creditor as manifested by an objectively identifiable event… Any identifiable event that fixes the loss with certainty may be taken into consideration…”
While the PPP loan forgiveness is excluded from income for tax purposes, it remains income for book purposes. Here are the journal entries for a $50,000 PPP loan:
The taxpayer will have a $50,000 Schedule M-1 adjustment to show the book/tax difference.
Don’t forget that a state may or may not conform to the federal tax treatment of these COVID-19 items. For example, California, the king of non-conformity, treats PPP loan forgiveness as non-taxable but disallows deductions used to generate PPP loan forgiveness (the federal treatment before the Consolidated Appropriations Act, 2021).
I have a brief, free webinar where I discuss PPP loan accounting under the Consolidated Appropriations Act, 2021. You can view it here.
Are Security Deposits Taxable?
This is commonly misunderstood - is receipt of a rental security deposit income?
In most circumstances, the answer is no. You won’t find the answer explicitly in the Internal Revenue Code, as it is an application of case law.
If a tenant is entitled to a security deposit refund under the lease terms, the deposit isn’t income to the landlord at the time of receipt, even if the landlord doesn’t segregate the security deposit. The deposit is only income at the time the landlord has the right to retain some or all of the security deposit under the terms of the lease. See Comm. v. Indianapolis Power & Light Company, 493 U.S. 203 (1990) for more discussion on this issue.
Here are the journal entries for the receipt of a $1,500 security deposit and the later return of only $1,000 of that deposit:
My Upcoming Education Events
Compass Tax Educators, of which I am a co-owner, is offering its annual all-access pass for all live webinar events from May 1, 2021 through April 30, 2022. We guarantee we will offer at least 30 CE/CPE. You can see the courses planned and purchase a pass here. Early bird pricing ends on January 31, 2021.
As part of the entire package, I’ll be teaching any “breaking news” events due to new tax law plus the following scheduled classes:
May 6, 2021 - Fringe Benefits & Accountable Plans
June 10, 2021 - Installment Sales
June 24, 2021 - Debt Cancellation & Bankruptcy Tax Issues
August 26, 2021 - Form 1116 - The Basics
October 21, 2021 - Gambling Tax Issues
December 2, 2021 - C Corporation Tax Planning
December 9, 2021 - 2021 Tax Update: Individuals
December 16, 2021 - 2021 Tax Update: Businesses
Arizona Society of Enrolled Agents Southwest Fest - June 14-16, 2021
Topics to be announced