Don’t mistake forgiveness for tax-free treatment
A memorandum from the Office of Chief Counsel at the Internal Revenue Service regarding the proper treatment of improperly forgiven Paycheck Protection Program (“PPP”) loans was recently issued. In certain cases, PPP loans were forgiven by the Small Business Administration (“SBA”), even though the borrower may not have qualified for the loan or forgiveness.
If you recall, PPP was put in place at the beginning of the COVID-19 pandemic to provide businesses with forgivable loans with the intent of keeping their employees off of the unemployment line.
The memorandum questions, “if a taxpayer makes one or more representations that he or she satisfies the conditions for forgiveness of a PPP loan under 15 U.S.C. section 636m and 636(a)(37)(J)(“qualifying forgiveness”), but does not factually satisfy the conditions for a qualifying forgiveness, and as a result, has P.P.P. loan forgiven improperly…”, can the taxpayer treat the loan forgiveness as non-taxable income?
The quick and easy answer…NO.
PPP loans had to be used for eligible expenses, as defined by the Coronavirus Aid, Relief, and Economic Security Act and subsequent legislation. These expenses mainly centered around payroll and occupancy costs (rent, utilities, etc.). These loans were provided for and largely forgiven based on the borrowers’ certifications and documentation that they provided to lending institutions and, subsequently, the SBA Once these loans were deemed forgiven by the SBA, the amounts were to be treated as “canceled indebtedness” and not subject to federal, and in many cases, state, income tax. In other words, the expenses were deemed deductible, and the associated loan forgiveness was to be excluded from taxable income.
“Forgiveness of a PPP loan is a qualifying forgiveness only if the use of the loan proceeds satisfies the conditions relating to specified costs (as described in 15 U.S.C. § 636m(b), (d)). To receive a qualifying forgiveness, the loan recipient must apply for the forgiveness in accordance with the specific procedures outlined in the statute and associated regulations.” It seems straightforward, right?
As a Second Circuit decision discusses… “forgiveness is neither automatic nor guaranteed.”
The full memorandum can be found here: https://www.irs.gov/pub/irs-wd/202237010.pdf
