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If you fudged the facts on your Paycheck Protection Program (PPP) loan forgiveness application, you may be subject to tax and penalties on the forgiven amount.
Borrowers must meet requirements for PPP loan forgiveness
The federal government's Small Business Administration instituted the PPP loan program to provide relief to businesses affected by COVID-19. The program's purpose was to help businesses keep their workforce employed during the crisis. If taxpayers meet certain requirements, the loans are forgiven. Generally, forgiven loans are taxable as discharge of debt income. However, a taxpayer may exclude from income the cancelled amount of an eligible PPP loan.
According to the IRS, 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 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 that was (a) in business on or before February 15, 2020, and (b) had employees or independent contractors who were paid for their services. Self-employed individuals, sole proprietors, and independent contractors are also eligible recipients.
- The loan proceeds were used to pay eligible expenses. Eligible expenses include items such as payroll costs, rent, interest on the business' mortgage, and utilities.
- The loan recipient applied 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 a taxpayer meets the conditions above, the taxpayer may exclude the forgiven amount of the PPP loan from income. If the conditions are not met, the taxpayer must include as taxable income the portion of forgiven PPP loan proceeds that do not meet the conditions.
Misrepresentations discovered by the IRS
The IRS has stated that many PPP loan recipients who received loan forgiveness were qualified and used the loan proceeds properly to pay eligible expenses. However, the IRS has discovered that some recipients who received loan forgiveness did not meet one or more eligibility conditions. According to the IRS, 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.
For example, assume that Shady is an eligible small business that received a PPP loan, but did not use the loan proceeds for eligible expenses. The business applied for forgiveness of its PPP loan in 2020 as if it was qualified for loan forgiveness. In its loan forgiveness application, Shady failed to include all relevant facts that would indicate that it was not eligible for a qualifying forgiveness of its PPP loan. Based on the omissions and misrepresentations on the application, the lender approved the application, and Shady received forgiveness of its PPP loan. Because the PPP loan forgiveness was based on omissions and misrepresentations, the loan does not fall within the scope of loans that could be forgiven. Shady, therefore, may not exclude the loan forgiveness from gross income.
Taxpayers urged to comply...or else
The IRS is urging taxpayers who inappropriately received forgiveness of their PPP loans to take steps to come into compliance. They can do this, for example, by filing amended returns that include forgiven loan proceed amounts in income.
On the other hand, in the words of IRS Commissioner Chuck Rettig, “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.”
