The Internal Revenue Service recently issued guidance addressing improper forgiveness of a Paycheck Protection Program loan (PPP loan), which states that improperly forgiven Paycheck Protection Program loans are taxable, as federal investigators uncover billions of dollars in fraud tied to pandemic relief programs. The PPP loan program was originally established by the CARES Act in March 2020 to help small businesses hit by the COVID-19 pandemic in paying certain expenses, and it was later extended in follow-up legislation and regulations that made it easier to apply for forgiveness of PPP loans. Additionally, the PPP loan program was further extended by the Economic Aid to Hard-Hit Small Businesses, Non-profits and Venues Act.
The IRS cited a memorandum by its office of Chief Counsel, which states that when a taxpayer’s loan is forgiven based upon misrepresentations or omissions, the taxpayer is not eligible to exclude the forgiveness from income and needs to include in income the portion of the loan proceeds that were forgiven based upon misrepresentations or omissions. As a result, these recipients received forgiveness of their PPP loan through misrepresentation or omission and either didn’t qualify to receive a PPP loan or misused the loan proceeds. With that said, taxpayers who inappropriately received forgiveness of their PPP loans should immediately take the necessary steps to come into compliance; for example, by filing an amended return that includes the amount of the forgiven loan proceeds within their stated income.
Under the terms of the PPP loan program, lenders can forgive the full amount of the loan if the loan recipient meets three conditions:
- The loan recipient was eligible to receive the PPP loan. An eligible loan recipient is a small business concern, independent contractor, eligible self-employed individual, sole proprietor, business concern, or a certain type of tax-exempt entity; was in business on or before Feb. 15, 2020; had employees or independent contractors who were paid for their services, or was a self-employed individual, sole proprietor or independent contractor.
- The loan proceeds had to be used to pay eligible expenses, such as payroll costs, rent, interest on the business’ mortgage, and utilities.
- The loan recipient had to apply for loan forgiveness. The loan forgiveness application required a loan recipient to attest to eligibility, verify certain financial information, and meet other legal qualifications.
If those three conditions are met, then under the PPP loan program the forgiven portion can be excluded from income. However, if the conditions are not all met, then the amount of the loan proceeds that were forgiven but do not meet the conditions must be included in income and any additional income taxes need to be paid to the IRS.
By issuing this guidance, it shows the IRS’s continuous commitment to ensuring that all taxpayers are paying their fair share of taxes. They are not only committed to holding those who are abusing such programs accountable but will also be considering all available treatment and penalties, as a result.
Please contact our office if you have any questions or need clarification regarding these condition requirements and/or need any assistance in filing any necessary amended returns regarding your PPP loan.