IRS: Improperly Canceled Paycheck Protection Program Loans Are Taxable

WASHINGTON — The Internal Revenue Service recently issued guidelines regarding the improper forgiveness of a Paycheck Protection Program loan (PPP loan).

The guidelines confirm that where a taxpayer’s loan is forgiven on the basis of misrepresentation or omission, the taxpayer is not entitled to exclude the forgiveness from income and must include in its income the part of the proceeds of the loan which has been remitted on the basis of misrepresentation or omission. Taxpayers who have improperly received a forgiveness of their PPP loans are encouraged to take steps to come into compliance, such as filing amended returns that include forgiven loan amounts in their income.

“This action underscores the Internal Revenue Service’s commitment to ensuring that all taxpayers pay their fair share of taxes,” IRS Commissioner Chuck Rettig said. “We want to make sure those who abuse these programs are held accountable, and we will review all available treatments and penalties to address abuse.”

Many PPP loan recipients who received loan forgiveness were qualified and correctly used loan proceeds to pay eligible expenses. However, the IRS found that some recipients who received loan forgiveness did not meet one or more eligibility requirements. These beneficiaries received a forgiveness of their PPP loan through misrepresentation or omission and were either not eligible to receive a PPP loan or misused the loan proceeds.

The PPP Loan Program was established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act) to help American small businesses that have been impacted by the COVID-19 pandemic pay for certain expenses. The PPP Loan Scheme has been extended by the Economic Relief Act to Small Businesses, Non-Profit Organizations and Hard-Hit Sites.

Under the terms of the PPP loan program, lenders can cancel the entire loan amount if the loan recipient meets three conditions.

1 – The loan recipient was eligible to receive the PPP loan. An eligible loan recipient:

  • is a small business, independent contractor, qualifying self-employed, sole proprietor, corporation, or some type of tax-exempt entity;
  • was in business on or before February 15, 2020; and
  • had employees or independent contractors who were paid for their services, or was self-employed, sole proprietor, or independent contractor.

2 – Loan proceeds were to be used to pay eligible expenses, such as payroll costs, rent, business mortgage interest and utilities.

3 – The loan recipient had to apply for loan forgiveness. The application for loan forgiveness required the loan recipient to certify eligibility, verify certain financial information, and meet other legal qualifications.

If the above 3 conditions are met, under the PPP loan program, the canceled portion is excluded from income. If the conditions are not met, the amount of loan proceeds that have been canceled but do not meet the conditions must be included in income and any additional income tax must be paid.

To report illegal tax-related activity related to PPP loans, submit Form 3949-A, Information Referral. You should also report instances of IRS-related phishing attempts and fraud to the Treasury Inspector General for Tax Administration at 800-366-4484.

Comments are closed.