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Updated by Kevin E. Thorn on Dec 21, 2020
Headline for 5 Important Facts About PPP Loans for Companies Seeking Loan Forgiveness
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5 Important Facts About PPP Loans for Companies Seeking Loan Forgiveness

While the Paycheck Protection Program (PPP) allows for eligible businesses to obtain a federally-backed loan of up to $10 million at a 1% interest rate with payments deferred for 6 months, the primary benefit for most companies is the ability to have loans forgiven if they meet certain conditions. For companies preparing to apply for forgiveness, it is important to have a clear understanding of these conditions, as well as the federal income tax implications of securing forgiveness under the PPP.

1

PPP Loan Recipients Must Ensure that They are Eligible for Loan Forgiveness

Prior to applying for forgiveness through their lenders, PPP loan recipients must ensure that they are eligible. While there are several criteria for PPP loan forgiveness eligibility (the U.S. Small Business Administration (SBA) FAQ for Lenders and Borrowers is a good resource), the main criteria are:

  • Eligibility to obtain a loan under the PPP (i.e. compliance with the payroll and business size requirements);
  • Necessity due to the, “uncertainty of current economic conditions,” caused by the COVID-19 crisis; and,
  • Use of PPP loan funds solely for authorized business expenses (i.e. payroll expenses, health insurance premiums, mortgage or rent payments, interest payments under pre-existing obligations, and utilities).
2

Submitting a Loan Forgiveness Application Could Trigger an SBA Audit

For many companies, submitting a loan forgiveness application will trigger an SBA audit. Under its latest guidance, the SBA will be auditing all companies that received PPP loans of $2 million or greater, and it will be auditing recipients of smaller loans in some instances as well.

3

Companies that Violate the Terms of the PPP Can Face Steep Penalties

If an SBA audit reveals that a company has not complied with the terms of the PPP, not only could its forgiveness application be denied, but it could face additional penalties as well. The SBA, the Department of Justice (DOJ), the Internal Revenue Service (IRS) and various other federal agencies are all conducting federal fraud investigations targeting the improper use of PPP loan funds.

4

Forgiven PPP Loan Amounts are Tax-Exempt

If your company’s PPP loan is forgiven, the amount of the loan does not need to be reported as taxable income. Forgiven PPP loan amounts are tax-exempt under Section 265(a)(1) of the Internal Revenue Code (IRC).

5

Business Expenses Paid with Forgiven PPP Loan Funds are Not Tax-Deductible

Crucially, since forgiven PPP loans are tax-exempt, this also means that business expenses paid with PPP loan funds are not tax deductible. The IRS has made this clear with its recently-issued Notice 2020-32. Claiming deductions for business expenses paid with forgiven PPP loan amounts could lead to allegations of business income tax fraud, and these allegations could lead to steep penalties as well.

If you have questions or concerns about your company’s federal income tax obligations in relation to its use of PPP loan funds, we encourage you to seek appropriate tax and legal guidance to learn more about your options.

  • Thorn Law Group, which was founded by tax attorney Kevin E. Thorn, is an experienced law firm whose mission is to successfully represent you in sensitive tax controversies. Thorn Law Group assists clients all over the U.S. and internationally. We associate with local counsel throughout the world in a broad range of tax disputes, including Business and Employment Tax, Criminal Tax Investigations, IRS Audits and Appeals, International Tax Issues as well as voluntary disclosure of Offshore Account and Foreign Company Issues.

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