Improperly forgiven Paycheck Protection Program (PPP) loans are taxable, the IRS’s Office of Chief Counsel wrote in a recent memorandum, Accounting Today reported.
The memorandum, released last week, issued guidance stating, "If a taxpayer who does not factually satisfy the conditions for a qualifying forgiveness causes its lender to forgive the PPP loan by inaccurately representing that the taxpayer satisfies them, the taxpayer may not exclude the amount of the forgiven loan from gross income under 15 U.S.C. § 636m(i) or section 276(b)(1) of the CTRA 2020." According to Accounting Today, if taxpayers inappropriately received forgiveness of their PPP loans, they should take steps to come into compliance. One way would be by filing amended returns that list the amount of the forgiven loan proceeds as part of their stated income.
The IRS memorandum includes scenarios that illustrate some of the potential situations encountered by taxpayers.
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 loan recipient was eligible to receive the PPP loan; the loan proceeds were used to pay eligible expenses, such as payroll costs, rent, interest on the business' mortgage, and utilities; and 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 those three conditions, then the forgiven portion can be excluded from income, according to Accounting Today. But if a taxpayer fails to meet those conditions, then any forgiven loan amount that doesn't meet the conditions has to be listed as income, and the taxpayer must pay taxes on that amount.
The guidance comes amid reports of massive fraud in pandemic relief programs such as PPP. Earlier this year, NBC News reported that as much as $80 billion, or one tenth of the total, may have been fraudulently distributed under the program.