Improperly Forgiven PPP Loans Are Taxable

Dec 6, 2022 | Financial Planning, Tax & Accounting

Recipients of Paycheck Protection Loans (PPP) should be aware that when a taxpayer’s loan is forgiven based upon misrepresentations or omissions, they are not eligible to exclude the forgiveness from income. They must, instead, include in income the portion of the loan proceeds that were forgiven based upon misrepresentations or omissions.

Background

The PPP loan program was established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act) to assist small US businesses that were adversely affected by the COVID-19 pandemic in paying certain expenses. The PPP loan program was further extended by the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act.

Under the terms of the PPP loan program, lenders can forgive the full amount of the loan 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 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 February 15, 2020; and
  • had employees or independent contractors who were paid for their services or were self-employed individuals, sole proprietors, or independent contractors.

2. The loan proceeds had to be used to pay eligible expenses, such as payroll costs, rent, interest on the business’ mortgage, and utilities.

3. The loan recipient had to apply for loan forgiveness. The loan forgiveness application requires a loan recipient to attest to eligibility, verify certain financial information, and meet other legal qualifications.

If the three conditions above are met, the forgiven portion is excluded from income under the PPP loan program. If the conditions are not met, then the amount of the loan proceeds that were forgiven but did not meet the conditions must be included in income, and any additional income tax must be paid.

Recipients not meeting eligibility requirements:

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

To ensure that all taxpayers pay their fair share of taxes, taxpayers who abuse such programs should be held accountable. To report tax-related illegal activities relating to PPP loans, submit Form 3949-A, Information Referral. Taxpayers should also report instances of IRS-related phishing attempts and fraud to the Treasury Inspector General for Tax Administration at 800-366-4484.

Help is available.

If you are a taxpayer who inappropriately received forgiveness of PPP loans, now is the time to take steps to come into compliance. One way to do this is by filing an amended return(s) that includes forgiven loan proceed amounts as income. If you have questions about this topic, want more information, or need help filing an amended return, please call the office today.

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