The IRS recently issued guidance to taxpayers who received forgiveness of their Paycheck Protection Program (‘PPP’) loan inappropriately, encouraging them to take steps towards compliance, including filing amended returns that include the forgiven loan amounts, as income. As you probably remember, the PPP loan program was established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act) to help small businesses that were adversely impacted by the COVID-19 pandemic, and it was extended by the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act. The IRS has discovered that some recipients received forgiveness of their PPP loan by misrepresenting their needs or omitting pertinent information, leading some to receive the loan when they did not qualify for it. Additionally, others qualified for the loan, then misused the loan proceeds, equally egregious in the eyes of the IRS. Under the terms of the PPP loan program, lenders could forgive the full amount of the loan, if the loan recipient met three conditions:
- Eligible Recipient: The loan recipient was eligible to receive the PPP loan if they were a small business, independent contractor, eligible self-employed individual, sole proprietor, business concern, or a certain type of tax-exempt entity, and was in business on or before February 15, 2020, and had employees or independent contractors who were paid for their services, or was a self-employed individual, sole proprietor or independent contractor.
- Eligible Expenses: The loan proceeds had to be used to pay eligible expenses, such as payroll costs, rent, interest on the business’ mortgage, and utilities.
- Application for loan forgiveness: The loan recipient had to apply for loan forgiveness, which required them to attest to eligibility, verify certain financial information, and meet other legal qualifications.
The IRS has stipulated that, if the above conditions were not met, then the amount of the loan proceeds that were forgiven, must be included in income and any additional income tax must be paid. They also informed that reporting tax-related illegal activities relating to PPP loans, may be done through submission of Form 3949-A, Information Referral.