Navigating the rules of information reporting for tax purposes is often a challenge — and reporting for certain transactions that took place in 2020 is no exception due to new guidance surfacing regularly.
With Paycheck Protection Program (PPP) loans on the minds of many businesses, there has been a lot of uncertainty around the taxability of the loans and their related forgiveness, including how to handle subsidized payments made by the SBA. This gives rise to several questions surrounding the requirements for lenders. As these loans are being forgiven or subsidized, what is the lender’s responsibility related to information reporting?
Section 1112 of the Coronavirus Aid, Relief and Economic Security (CARES) Act, allowed the Small Business Administration (SBA) to subsidize certain payments of principal, interest and associated fees owed by a borrower on certain 7(a) loans, 504 loans and microloans. Under Section 278(c)(1) of the COVID Tax Relief Act (COVIDTRA), for tax years ending after March 27, 2020, these subsidized payments are not considered gross income to the borrower.
The Treasury Department and the Internal Revenue Service (IRS) have waived the requirement to file information returns with respect to these amounts, which are excluded from the borrower’s gross income. The forms should also not be furnished to the borrower in these situations. The recently released IRS Notice 2021-6 provides guidance on these items, including (but not limited to) original PPP covered loan forgiveness, PPP II covered loan forgiveness, treasury program loan forgiveness and loan subsidies.
PPP covered loan forgiveness
Under Section 7A(i) of the Small Business Act and Section 311 of the Economic Aid Act, a lender is not required to file Form 1099-C with the IRS, or furnish it to the borrower, for forgiveness of original PPP covered loans or PPP II covered loans. No amount of a forgiven PPP loan or forgiven PPP II loan is included in the gross income of the borrower.
Treasury program loan forgiveness
A lender is not required to file Form 1099-C with the IRS, or furnish it to the borrower, to report forgiveness of loans under Section 1109 of the CARES Act.
A lender is not required to and should not file Form 1099-MISC with the IRS, or furnish it to the borrower, for the payment of principal, interest and any associated fees through a loan subsidy that was authorized under Section 1112(c) of the CARES Act. Specifically, Section 1112(c) of the CARES Act authorizes the SBA to cover, for a six-month period, the principal, interest and any associated fees that small businesses owe on 7(a) loans, 504 loans and microloans.
The waiver of the information reporting requirements above does not impact any requirements for filing and furnishing Form 1098 to the extent otherwise needed.
If 1099 forms are filed contrary to the guidance above, the error could cause confusion for the recipient as well as result in IRS correspondence to the borrower claiming underreported income. In a recent release from the IRS (Announcement 2021-2), it was clarified that any lenders that filed Form 1099 to report payments on SBA-subsidized loans as income to the borrower must file a corrected Form 1099 to exclude the subsidized payments. Corrected payee statements must be furnished within 30 days of the furnishing deadline (February 1, 2021, for calendar year 2020) to have reasonable cause for any failure-to-furnish penalty under Code Sec. 6722. In addition, a lender must file corrected information returns by the filing deadline (March 1, 2021, for paper filers and March 31, 2021, for e-filers) to avoid failure-to-file penalties under Code Sec. 6721.
How Wipfli can help
Navigating the rules of information reporting for tax purposes can be a challenge, but our team is ready to help. Contact us today or learn more about COVID-19 related legislation in our resource center.