PPP Loan Recipients Are Subject To Taxes If They Fail To Meet These Conditions

TL;DR: The IRS has found that certain PPP loan borrowers who were forgiven their debt did not meet one or more eligibility requirements. This guide explains who qualifies, the rules that apply, and how to apply them to your situation.

The IRS has found that certain PPP loan borrowers who were forgiven their debt did not meet one or more eligibility requirements. These recipients, who either did not meet the requirements for a PPP loan or spent the loan funds improperly, were granted forgiveness of their PPP loan through misrepresentation or omission.

The Coronavirus Aid Relief and Economic Security Act (CARES Act) created the PPP loan program to help small US businesses who were negatively impacted by the COVID-19 pandemic in paying various expenses and costs. The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act further expanded the PPP lending program.

PPP Loan Program Conditions

1) The loan recipient was eligible to receive a 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 (a corporation, unincorporated association, etc.);
• was in business on or before February 15, 2020; and
• had employees or independent contractors who were paid for their services, or was self-employed individual, sole proprietor, or independent contractor.

2) The loan proceeds had to be used to pay eligible expenses, such as payroll costs, rent, interest on the business’ mortgage, and utilities.

3) 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.

Will Your PPP Loans Be Taxable Or Will They Be Excluded From Income?

If the three conditions above are met, then under the PPP loan program the forgiven amount the recipient receives is excluded from income. The amount of the loan proceeds that were forgiven but do not meet the conditions must be included in the income and any additional income tax must be paid if the loan recipient doesn’t meet the conditions.

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