Improperly Forgiven Paycheck Protection Program (PPP) Loans are Taxable

Some recipients who received PPP loan forgiveness did not meet one or more eligibility conditions. These recipients received forgiveness of their PPP loan through misrepresentation or omission, and either did not qualify to receive a PPP loan or misused the loan proceeds.

IRS’s recent guidance regarding improper forgiveness of PPP loans confirms that when a taxpayer's loan is forgiven based upon misrepresentations or omissions, the taxpayer cannot exclude the forgiveness from income. The taxpayer must include in income the portion of the loan proceeds that were forgiven based upon misrepresentations or omissions.
Lenders can forgive the full amount of a PPP loan if the recipient meets three conditions:

  1. The loan recipient was eligible to receive the PPP loan. An eligible loan recipient:
    • is a small business concern, independent contractor, eligible self-employed individual, sole proprietor, business concern, or a certain type of tax-exempt entity;
    • 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.
  2. The loan proceeds were used to pay eligible expenses, such as payroll costs, rent, interest on the business' mortgage, and utilities.
  3. 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.

Taxpayers who inappropriately received forgiveness of their PPP loans are encouraged to take steps to come into compliance. Learn more here, including how to report tax-related illegal activities relating to PPP loans.