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IRS Says Wrongfully Canceled Paycheck Protection Program Loans Are Taxable

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WASHINGTON- The Internal Revenue Service recently released advice on improper forgiveness of a Paycheck Protection Program loan (PPP loan).

The guidelines confirm that where a taxpayer’s loan is forgiven due to misrepresentation or omission, the taxpayer is not entitled to exclude the forgiveness from income and must include in income the portion of the proceeds of the loan that was forgiven due to misrepresentation or omission. Taxpayers who have improperly received a forgiveness of their PPP loans are encouraged to comply, for example, by filing amended returns that include forgiven loan amounts in their income.

“This action underscores the Internal Revenue Service’s commitment to ensuring that taxpayers pay their fair share of taxes,” IRS Commissioner Chuck Rettig said. “We want to make sure that those who abuse these programs are held accountable, and we will review all treatments and sanctions available to remedy the 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 recipients received their PPP loan forgiveness 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 program has been extended by the Economic Relief Act to small businesses, nonprofits and hard-hit places.

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

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