If you are like many business owners, you may have received one or more Paycheck Protection Program (PPP) loans during COVID-19 pandemic. If you recall, the federal government authorized monetary help in the form of the $2 trillion CARES Act to help businesses in the form of loans that could be forgiven. If you received PPP funds, you must make sure your loan was applied for and applied properly to pay eligible expenses in order for it to be forgiven. As a San Francisco IRS attorney, I have received many inquiries about PPP loans and whether the loan is taxable.
The Internal Revenue Service (IRS) recently issued guidelines addressing improper forgiveness of PPP loans. The guidelines indicate that your PPP loan will not be forgiven if it was based upon an omission or misrepresentation. As such, if the conditions are not met for proper loan forgiveness, the loan proceeds must be reported as taxable income and you will owe additional taxes on that amount.
According to the terms of the PPP loan, the following three conditions must be met in order for the lender to forgive the amount. First, the loan recipient was eligible to receive the PPP loan. Eligibility means you had to be a small business concern, independent contractor, eligible self-employed individual, sole proprietor, business concern, or a certain type of tax-exempt entity; must have been 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.
Second, the PPP loan proceeds had to be used to pay eligible expenses, such as payroll costs, rent, interest on the business’ mortgage and utilities. Third, the loan recipient had to apply for loan forgiveness. Loans were not automatically forgiven by the lender. The loan forgiveness application required the recipient to attest to eligibility, verify certain financial information and meet other legal qualifications. If these three conditions were met, then the PPP loan is forgiven and excluded from income. This means you do not owe taxes on the loan.
However, if the conditions were not met, then the PPP loan must be included as income and any additional income tax must be paid. If you received PPP loans and did not meet the eligibility criteria, there are steps you can take to become compliant. For example, file an amended return that includes forgiven loan proceeds in income. You may also consult with an experienced San Francisco IRS attorney who can help bring your taxpayers status into compliance with the IRS.
If you are a business owner that received one or more PPP loans and are unsure if your loans were eligible for forgiveness under the guidelines, talk to an experienced San Francisco IRS attorney. An attorney can make sure you don’t owe more income tax and penalties. Remember, you don’t have to navigate the IRS or PPP by yourself.
Allison Soares is a partner and tax attorney at Vanst Law. Before starting her own practice, Soares was a partner at a tax law firm where she honed her skills handling a wide variety of tax and employment-related cases. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits.
