This past Wednesday, the Internal Revenue Service made a statement saying that improperly forgiven Paycheck Protection Program (PPP) loans are taxable. The statement was made after federal investigators uncovered billions of dollars in fraud related to several pandemic relief programs like the PPP.

The Memorandum

The memorandum the IRS released by the Office of Chief Counsel explained that when a taxpayer’s loan is forgiven based upon misinterpretations or omissions, the taxpayer isn’t eligible to exclude the forgiveness from income.  Additionally, taxpayers will need to include the portion of the loan proceeds that were forgiven based upon misinterpretations or omissions in their income. According to NBC news, approximately 10% of the $800 billion ($80 billion) may have been fraudulently distributed. “This action underscores the Internal Revenue Service’s commitment to ensuring that all taxpayers are paying their fair share of taxes,” said IRS Commissioner Chuck Rettig in a statement Wednesday. “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.”

Other pandemic relief programs, like the Employee Retention Credit, could amount to trillions of dollars in fraudulent money. The IRS did acknowledge, however, that most of the PPP loan forgiveness recipients were rightfully forgiven and met all the proper requirements to receive it. But they discovered that some who did receive the loan forgiveness did not meet one or more of the requirements.

The PPP Loan and Its Requirements

The PPP loan program was established by the CARES Act in March 2020 to aid small businesses impacted by the COVID-19 pandemic, for extra expenses taken on by the business for things like PPE (personal protection equipment). Under the terms of the PPP loan program, lenders can forgive the full amount of the loan if they met these three requirements:

• Eligible recipients:

• • Is a small business concern (AKA a business that is independently owned and operated and which is not dominant in its field of operation and in conformity with specific industry criteria), independent contractor, eligible self-employed individual, sole proprietor, business concern, or a certain type of tax-exempt entity;
  • Was in business on or before Feb. 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.

• The loan proceeds had to be used to pay eligible expenses, such as payroll costs, rent, interest on the business’ mortgage, and utilities.
• The loan recipient had to apply for loan forgiveness. The loan forgiveness application required a loan recipient to attest to eligibility, verify certain financial information, and meet other legal qualifications.

Wrap Up

Taxpayers who inappropriately received the PPP loan forgiveness should be encouraged to take steps to come into compliance with the IRS, by filing amended returns that include the amount of the forgiven loan proceeds with their stated income. If you think you may require assistance in this matter, it could be a good idea to contact a professional financial advisor for assistance.