What If I (or My Business) Received PPP Loan Forgiveness Improperly?

Under the federal Paycheck Protection Program (PPP), businesses that received loans and used the proceeds for eligible business purposes qualified for complete loan forgiveness. Qualifying businesses could self-certify, and most participating lenders would grant forgiveness without much more than a cursory review.

But, now the Internal Revenue Service (IRS) is taking a closer look. Recently, the IRS published guidance regarding the tax implications of fraudulently certifying for PPP loan forgiveness, and in an accompanying News Release, IRS Commissioner Chuck Rettig stated, “We want to make sure that those who are abusing [the PPP] are held accountable, and we will be considering all available treatment and penalty streams to address the abuses.”

Requirements for PPP Loan Forgiveness Certification

To qualify for forgiveness, PPP loan recipients must meet three basic requirements: (i) they must have been eligible to receive their PPP loans; (ii) they must have used their PPP funds for payroll, rent, mortgage interest and utilities exclusively; and, (iii) they must certify to compliance with the program’s requirements. This certification, or attestation, involves “verifying that the loan proceeds were properly expended on eligible expenses and that the amount applied for forgiveness satisfies all the limitations relating to specified costs, and meet other legal requirements.”

Tax Implications of Obtaining PPP Loan Forgiveness

For businesses that receive PPP loan forgiveness, the CARES Act provides that “no amount shall be included in the gross income of the eligible recipient by reason of forgiveness of indebtedness.” In other words, businesses are not required to treat properly forgiven PPP loans as taxable income. But, if a business receives PPP loan forgiveness improperly, then the IRS makes clear that:

“[W]hen a taxpayer's loan is forgiven based upon misrepresentations or omissions, the taxpayer is not eligible to exclude the forgiveness from income and must include in income the portion of the loan proceeds that were forgiven based upon misrepresentations or omissions.”

In addition to facing federal income tax liability, businesses that improperly obtained PPP loan forgiveness can face other consequences as well. The IRS and IRS Criminal Investigations (IRS CI) are both actively targeting PPP loan recipients, and those accused of fraud under the program can face civil or criminal penalties.

Options for Businesses That Obtained PPP Loan Forgiveness Improperly

With all of this in mind, what should business owners do if they are concerned that their companies may have obtained PPP loan forgiveness improperly? The answer to this question depends on the circumstances at hand. While the IRS advises that businesses should “take steps to come into compliance by, for example, filing amended returns,” filing an amended return can be risky in some cases. For some businesses, voluntary disclosure will be a better option, and those that cannot afford to pay what they owe may need to consider other alternatives as well.

Request a Confidential Consultation with Tax Lawyer Kevin E. Thorn

If you need advice about how to handle your New Jersey business’s federal tax obligations, we invite you to schedule an appointment at Thorn Law Group. To request a confidential consultation with tax lawyer and Managing Partner Kevin E. Thorn, please call 201-842-7696, email ket@thornlawgroup.com or inquire online today.