Compliance for Improperly Forgiven PPP Loans
Posted on September 26, 2022
The Internal Revenue Service has issued IR-2022-162 to provide guidance addressing the improper forgiveness of a Paycheck Protection Program loan (PPP loan).
The guidance concludes that, when a taxpayer's loan is forgiven based upon misrepresentations or omissions, the taxpayer is not eligible to exclude the forgiveness from income and must include in income the portion of the loan proceeds that were forgiven based upon misrepresentations or omissions.
The guidance follows the rationale of a recent Chief Counsel Advice Memorandum 202237010 (August 19, 2022). In CCA 202237010 the IRS concluded that a taxpayer who does not satisfy the conditions for “qualifying forgiveness” may not exclude the amount of the forgiven loan from gross income under 15 U.S.C. Section 636m(i) or Section 276(b)(1) of the Covid-related Tax Relief Act of 2020. Qualifying forgiveness requires the loan recipient taxpayer meet three conditions:
- The loan recipient was an eligible recipient, in business on or before February 15, 2020 with employees or independent contractors who were paid for services, or self-employed, sole proprietor or independent contractor;
- The loan recipient used the loan proceeds for eligible expenses such as payroll, rent, mortgage or utilities; and
- The loan recipient applied for loan forgiveness and attested to eligibility.
If the loan recipient satisfies these three conditions the PPP loan qualifies for exclusion from income under 15 U.S.C. Section 636m(i) or Section 276(b)(1) of the Covid-related Tax Relief Act of 2020.
On the other hand, if the recipient has received forgiveness of the PPP loan based on misrepresentation or omission, the conditions for “qualifying forgiveness” have not been satisfied and forgiveness does not qualify for exclusion from income and the PPP loan proceeds must be included in gross income. The IRS takes this position notwithstanding the Small Business Administration’s (SBA) ability to pursue repayment of the non-qualifying funds.
Although the Chief Counsel Advice Memorandum may not relied upon by other taxpayers, CCA 202237010 does identify some relief for recipients of non-qualifying PPP loan funds. Footnote 19 in the Memorandum indicates that if the SBA determines a PPP loan was improperly forgiven and, consequently the taxpayer pays back the loan to the SBA in a later year, the repayment may result in a deductible expense under Internal Revenue Code Section 162 or a deductible loss under Code Section 165 for the later year depending upon the facts and circumstances.
Taxpayers reporting tax-related activities related to non-qualifying forgiveness of PPP loans may do so by submitting IRS Form 3949-A (Rev. 10-2020).
If you have questions about this or other PPP loan issues, please contact Dave Mosier.
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