Improperly Forgiven PPP Loans Are Taxable Income

The IRS Chief Counsel's Office confirmed in an Advice Memorandum that improperly forgiven paycheck protection loans are taxable income.

The IRS encourages PPP borrowers whose loans were wrongfully forgiven to submit original (or revised) forms that reflect any wrongfully forgiven loan amounts in income.

PPP loans are to help Small U.S. businesses affected by the COVID-19. The lender can forgive the loan if the borrower satisfies three requirements..

Paycheck protection program loans

*  is a small business, independent contractor, self-employed individual, sole proprietor,or tax-exempt entity

1. The loan recipient qualified for the PPP loan. A loan recipient who qualifies:

*  was in business by February 15, 2020, or before; *  had workers, independent contractors, or was self-employed, single owner, or independent contractor.

2. The borrower utilized the loan funds to cover qualified expenses such as wages, rent, mortgage interest, and utilities.

3.The borrower applied for loan forgiveness and confirmed that they were eligible for a PPP loan, used loan funds for approved purposes, and satisfied other legal conditions.

The Advice Memorandum confirms that if these conditions aren't met, the forgiven portion of the loan must be included in income & any additional income tax must be paid.

Improperly forgiven PPP loans

According to the Advice, the taxpayer applied for a PPP loan in 2020. The taxpayer didn't use loan profits for qualified purposes but sought for debt forgiveness.

The Advice highlighted that the taxpayer's PPP loan was forgiven based on her misrepresentations or omissions she made in her forgiveness application.

The taxpayer's PPP loan forgiveness was not qualified for forgiveness since it was based on omissions and misrepresentations.