Are Forgiven PPP Loans Taxable?

The SBA Paycheck Protection Program (PPP) is probably the most significant small business funding relief effort in history.  The beautiful thing about the PPP is that borrowers can have their loans forgiven so long as they use the funds for qualifying expenses, which include payroll, rent, mortgage interest and utility payments.  The question we are going to discuss here are whether or not the PPP loans are taxable?  On one hand the short answer may be, “No,” but the complete answer could be, “Maybe.” It depends on whether you are considering federal taxes or state taxes.

We at Upwise are not accountants or lawyers, so we advise you to not take this article as tax or legal advice in anyway.  You should consult an accountant, tax preparer or tax attorney for legal advice.

The CARES Act states that a forgiven PPP loan will not be considered taxable income to the small business.  What typically happens when you’re forgiven debt by a lender or bank, the lender will typically give the borrower a 1099-C for the forgiven amount, which is included in the business tax return and the borrower will have to pay tax on that amount.  Congress did not want this to happen, so the CARES Act clearly states that the forgiven loan amounts will not be considered forgiveness of debt income.

Additionally, the IRS issued a notice stating that while the forgiven loan is not income, the business cannot expense the use of those funds if the funds are later forgiven because of tax rules already in existence regarding loan forgiveness and business expenses. Basically, that means small businesses will be taxed on their PPP loan forgiveness, as they will not be able to write off those expenses (payroll, rent, mortgage interest, utility bills).  This is to prevent a “Double Tax Benefit.”

In other words you won’t be able to get forgiveness of your PPP loan and take the tax deductions associated with the covered expenses. This is another area of expertise where we encourage you to seek the advice of your accountant.

This issue is still developing and is one that has come to a surprise for many small-business owners.  Even the CPA’s, accountants and tax attorneys have been surprised by this.  Lawmakers on the Senate Finance Committee have been working with the IRS to overrule and change the guidance on the IRS interpretation of this matter. 

We will need to wait for additional guidance from the SBA, the IRS, and state tax authorities depending upon the state you are in.  It is unclear how this will all play out. Depending on how quickly they respond to this situation, you may or may not have a state tax bill for the forgiven portion of a PPP loan.  Hopefully, there will be enough support to overturn the IRS Notice so that small businesses are not taxed on their PPP loan amounts.  The sooner small businesses have information the better off we will all be.