IRS Confirms That Improperly Forgiven PPP Can Be Taxed

In August, the IRS Chief Counsel’s Office issued an Advice Memorandum that provides guidance regarding Paycheck Protection Program loans (PPP), specifically in response to questions about PPP loan forgiveness and income tax statements. The IRS confirmed that improperly forgiven PPP loans are taxable income. Any borrower whose loans were not properly forgiven must file an original or amended tax return in order to include their PPP loan amount as income.

What are PPP Loans?

Paycheck protection program (PPP) loans were established in 2020 to assist small businesses that were affected by COVID-19 restrictions and pandemic response measures by providing income to cover certain expenses. As part of the program, PPP loans can be forgiven if the borrower can meet specific conditions:

1. The loan recipient was eligible to receive the PPP loan. This includes people who:

• Are a small business concern, independent contractor, eligible self-employed individual, sole proprietor, business concern, or a certain type of tax-exempt entity
• Were in business on or before February 15, 2020
• Hired employees or independent contractors who were paid for their services or was a self-employed individual, sole proprietor, or independent contractor

2. The borrower must have used the loan proceeds toward eligible expenses, which include payroll, rent, interest on the business’ mortgage, and utilities.

3. The borrower must have applied for loan forgiveness. The borrower must have attested the following:

• They were eligible for a PPP loan
• The loan proceeds were used for eligible expenses
• Certain financial information was correct
• They met other legal qualifications

PPP loans can be forgiven in part or full if these three requirements are met. Unlike other forgiven debts, the borrower was not required to include the forgiven portion of their PPP loan as income.
 

What are Improperly Forgiven PPP Loans?

The Advice Memorandum released by the IRS indicated that if any of these three conditions are not met, the loan may not be forgiven. Any portions of a PPP loan that were not forgiven must be included as income and are subject to income taxation.

As an example, the Advice Memorandum includes a scenario of a small business owner who applied for a PPP loan in 2020. The borrower failed to use the loan for eligible expenses but attested that she had used the funds correctly when she applied for loan forgiveness. Although the loan was forgiven based upon the omissions and misrepresentations from the forgiveness application, it did not qualify for forgiveness. As an improperly forgiven loan, it should have been included on the borrower’s tax return as income.

Additionally, although the Small Business Administration could have chosen to pursue repayment of the loan for misuse of funds, the borrower made a claim of right and retained the proceeds. The IRS concluded that the forgiven loans were, in fact, income.
 

Are You Wondering Whether Your PPP Loans are Taxable Income? Get Help from Arizona’s Leading Tax Attorneys

If you have questions regarding your PPP loans and what income you may need to claim on your tax return, contact the tax attorneys in Arizona. We have decades of experience working exclusively with tax law and are dedicated to remaining up to date on all of the latest updates from the IRS. Let us help you navigate your PPP loans! Contact our office today to schedule your confidential consultation.

Email: lchapman@silverlawplc.com
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