Page 527 - JoFA_2022

TAX MATTERS

Improperly forgiven PPP Act, 2021, P.L. 116-260. Both rounds of
loans must be included covered loans may be forgiven by lenders

in income if recipients meet criteria specified in 15
U.S.C. Sections 636(a)(36), 636(a)(37),
An IRS Chief Counsel memo states and 636m. Among the criteria are that
that income exclusion does not at least 60% of the loan amount must be
extend to Paycheck Protection used for payroll costs and up to 40% for
Program loan forgiveness for other specified costs, including payroll,
which the recipient is ineligible, interest on covered mortgages, covered
such as by misrepresentation or rent, and covered utility payments. To
have their loans forgiven, borrowers are
omission. required to properly submit applications

By Paul Bonner These taxpayers should take steps to to the SBA in accordance with specified
come into tax compliance, such as by procedures, making certain representa-
Taxpayers whose Paycheck Protection filing amended returns that include the tions and providing documentation.
Program (PPP) loans are forgiven under forgiven loan proceeds in income, the Resulting “qualifying forgiveness,” as
the program but who are ineligible for IRS advised. the CCA termed it, was excluded from
that forgiveness may not exclude the In arriving at its conclusion, the CCA gross income of an “eligible recipient” or
forgiven loan amount from gross income relied on both the terms and condi- “eligible entity” under 15 U.S.C. Section
for federal tax purposes, the IRS Office tions of the PPP and general federal 636m(i)(1).
of Chief Counsel stated. tax principles. In an example, the CCA described
The Chief Counsel Office’s position PPP loans are administered and guar- a taxpayer (Taxpayer X) who received a
and reasoning were outlined in Chief anteed by the U.S. Small Business Ad- first-draw PPP loan in 2020 and did not
Counsel Advice (CCA) 202237010 ministration (SBA), first provided under use the loan proceeds for eligible expens-
released Sept. 16. In an accompany- the Coronavirus Aid, Relief, and Eco- es. Taxpayer X nonetheless applied for
ing news release, the IRS said it was nomic Security Act, P.L. 116-136, and forgiveness as if she were eligible for it,
aware that some taxpayers’ PPP loans subsequently extended in a “second draw” omitting relevant facts that would have
have been inappropriately forgiven. under the Consolidated Appropriations indicated she was ineligible.
The CCA noted that the statutory
income exclusion provisions apply only
Roth contributions on the rise to qualifying forgiveness of a PPP loan.
“Failure to meet these conditions means
Total contributions by tax year. The average annual contribution per participating that there is no qualifying forgiveness,
taxpayer over the three tax years was $3,454. and thus the exclusions would not apply
to the forgiven PPP loan,” the CCA
$28
stated. The CCA cited Springfield Hospital
$27 Inc., 28 F.4th 403 (2d Cir. 2022), in
which the Second Circuit stated that
$26 “forgiveness [of a PPP loan] is neither au-
tomatic nor guaranteed. A borrower must
$25 apply for forgiveness, which will only be
Billions granted if specified criteria are met.”
$24
The CCA stated that its conclusion
$23 is also supported by the claim-of-right
tax doctrine, under which a taxpayer IMAGE BY ILLUSTRATOR DE LA MONDE/GETTY IMAGES
$22 must include in income an amount the
taxpayer receives under a claim of right
$21
2017 2018 2019 without substantial restriction, even
where the taxpayer may be liable to
Source: IRS Tax Statistics, Accumulation and Distribution of Individual Retirement Arrangements (IRAs), Table 1. return or relinquish the amount.

36 | Journal of Accountancy December 2022