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Exempt Org Form Will Address PPP Loan Forgiveness

By David van den Berg · December 3, 2020, 7:27 PM EST

The Internal Revenue Service plans to update tax return instructions soon to guide tax-exempt organizations on how to report forgiven Paycheck Protection Program loans, an agency official said Thursday.

Janine Cook, deputy associate chief counsel for employee benefits, exempt organizations and employment taxes, didn't provide a timeline for the update during a virtual meeting by the tax division of the American Institute of Certified Public Accountants.

Cook and Margaret Von Lienen, the agency's director of exempt organizations, said the instructions for Form 990 would indicate that forgiven loans should be reported as grants.

The loans were enacted as part of the Coronavirus Aid, Relief and Economic Security Act , which President Donald Trump signed into law in March. The loan program guarantees private two-year loans of up to $10 million at a 1% interest rate to cover expenses such as payroll costs. A loan is forgiven if the recipient keeps workers on the payroll through the pandemic crisis.

Asked how loan forgiveness would affect organizations' ability to meet the public support tests required for tax-exempt entities to maintain public charity status, Cook said the agency did not expect that charities would have a problem maintaining their status because of loan forgiveness if they would be charities otherwise.

There are two public support tests for public charities that measure support over five years. The first test generally requires that an organization get at least one-third of its financial support from general public contributions or meet a facts-and-circumstances test, according to the IRS.

The other test requires that nonprofits get more than a third of their support from general public contributions or gross receipts related to their tax-exempt purposes, and forbids them to get any more than a third of their support from gross investment income and unrelated business taxable income.

Jennifer Becker Harris, a CPA and chairwoman of the AICPA's exempt organizations technical resource panel, said on a separate news call that in light of Cook's announcement, charities shouldn't face a problem meeting either test.

Charities that don't pass the public support test for two consecutive years in a five-year period are deemed to be private foundations, which are subject to additional restrictions and potential excise taxes.

Richard Locastro, a CPA who is a member of the AICPA's exempt organizations technical resource panel, said on the news call that clarity on the issue would help practitioners serve their clients better.

"Having this predictability will help the clients and help us manage any potential risks there," he said.

--Additional reporting by Stephen Cooper and Andrew Kragie. Editing by Joyce Laskowski.

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