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IRS: Improperly Forgiven PPP Loans Are Taxable

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The Internal Revenue Service is warning that improperly forgiven Paycheck Protection Program loans are taxable.

Recent guidance issued by the IRS office of general counsel, the IRS said Wednesday, “confirms 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 must include in income the portion of the loan proceeds that were forgiven based upon misrepresentations or omissions.”

Taxpayers who inappropriately received forgiveness of their PPP loans “are encouraged to take steps to come into compliance by, for example, filing amended returns that include forgiven loan proceed amounts in income,” the IRS said.

IRS Commissioner Chuck Rettig said Wednesday in a statement that “this action underscores the Internal Revenue Service’s commitment to ensuring that all taxpayers are paying their fair share of taxes. We want to make sure that those who are abusing such programs are held accountable, and we will be considering all available treatment and penalty streams to address the abuses.”

The PPP loan program was established by the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, to assist small U.S. businesses that were adversely affected by the COVID-19 pandemic in paying certain expenses.

The IRS said that it has discovered that some recipients who received loan forgiveness did not meet one or more eligibility conditions.

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; and 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 the three conditions are met, “then under the PPP loan program the forgiven portion is excluded from income,” the IRS states.

“If the conditions are not 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 tax must be paid,” the IRS said.