IRS Letter on PPP forgiveness

 

Office of Chief Counsel
Internal Revenue Service
memorandum
Number: 202237010
Release Date: 9/16/2022
CC:ITA:B05:MLOsborne
POSTS-124403-21
UILC: 61.00-00
date: August 19, 2022
to: Carolyn A. Schenck
National Fraud Counsel
Katrine Shelton, Senior Counsel
SBSE, Area 7
from: Sue-Jean Kim
Senior Technician Reviewer, Branch 5
Office of Associate Chief Counsel (Income Tax & Accounting)
subject: Proper Treatment of Improperly Forgiven PPP Loans
This Chief Counsel Advice responds to your request for assistance. You have
requested advice on whether a taxpayer whose Paycheck Protection Program (PPP)
loan was forgiven even though the taxpayer did not qualify for the forgiveness must
include the PPP loan proceeds in gross income under section 61 of the Internal
Revenue Code.
This advice may not be used or cited as precedent.
Issue
If a taxpayer makes one or more representations that he or she satisfies the conditions
for forgiveness of a PPP loan under 15 U.S.C. §§ 636m and 636(a)(37)(J) (“qualifying
forgiveness”), but does not factually satisfy the conditions for a qualifying forgiveness1,
and as a result, has the PPP loan forgiven improperly, may the taxpayer exclude the
amount of the forgiven loan from gross income under 15 U.S.C. § 636m(i) or § 276(b)(1)
of the COVID-related Tax Relief Act of 2020 (CTRA 2020)?
1 A variety of fact patterns may establish that the taxpayer was not eligible for forgiveness under the
statute and related regulatory guidance. For example, the taxpayer may have used the funds for
personal expenditures. No implication is intended from the facts in the Situation presented below that it
limits the reasons why a particular forgiveness is not a qualifying forgiveness.

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Conclusion
If a taxpayer who does not factually satisfy the conditions for a qualifying forgiveness
causes its lender to forgive the PPP loan by inaccurately representing that the taxpayer
satisfies them, the taxpayer may not exclude the amount of the forgiven loan from gross
income under 15 U.S.C. § 636m(i) or section 276(b)(1) of the CTRA 2020.
Background on the Paycheck Protection Program Loans
A. PPP loans
PPP loans are loans made in accordance with the terms, conditions and processes
under the PPP. There were two rounds, or draws, of PPP loans. The first was provided
under section 1102 of the Coronavirus Aid, Relief, and Economic Security Act, Pub. L.
No. 116-136, 134 Stat. 281 (March 27, 2020) (CARES Act), to assist small businesses
in the United States adversely affected by the COVID-19 pandemic in paying payroll
costs and other eligible expenses. The second was provided under the Economic Aid
to Hard-Hit Small Businesses, Nonprofits, and Venues Act, Pub. L. No. 116-260, div. N,
title III, 134 Stat. 1993 (December 27, 2020) (Economic Aid Act), which amended and
extended the existing PPP provisions. The PPP is administered by the Small Business
Administration (SBA) as part of its "7(a) Loan Program" under § 7(a) of the Small
Business Act (15 U.S.C. § 636(a)). For both rounds of PPP loans (collectively, “covered
loans”), the lender may forgive, and the SBA may guarantee, the full principal amount, if
certain criteria are met as described below. See 15 U.S.C. §§ 636(a)(36), (a)(37), and
636m.
To implement the PPP, the SBA issued regulatory interim final rules (IFRs) in the
Federal Register in 2020 and 2021, including the Consolidated IFR implementing
updates to the PPP ("Consolidated IFR”),2 and the IFR on Loan Forgiveness
Requirements and Loan Review Procedures (“Loan Forgiveness IFR”).3 The
Consolidated IFR provides general rules governing covered loans and qualifying
forgiveness of those loans, and the Loan Forgiveness IFR further details the SBA rules
on qualifying forgiveness.
Lenders participating in the PPP may make PPP loans, fully guaranteed by the SBA, to
eligible recipients only under specified terms, conditions and processes of the program.
An "eligible recipient"4 is an individual or entity that is eligible to receive a covered loan.
A prospective recipient is eligible to receive a covered loan if the recipient (i) is a small
business concern (as determined by the SBA), independent contractor, eligible self-
employed individual, sole proprietor, business concern, or a certain type of tax-exempt
2 86 Fed. Reg. 3692 (January 14, 2021).
3 86 Fed. Reg. 8283 (Feb. 5, 2021).
4 For purposes of PPP Second Draw Loans, the term "eligible entity" is substituted for "eligible recipient."
See 15 U.S.C. § 636(a)(37)(A)(i).

POSTS-124403-21 3
organization as specified by the authorizing statutes; and (ii) was in business on
February 15, 2020, and either had employees or independent contractors whom the
recipient paid for services or was an eligible self-employed individual, sole proprietor, or
independent contractor.5
PPP loan proceeds may be used only for “eligible expenses,” namely, payroll costs,
rent, interest on the business’s mortgage, utilities, and other specified operations
expenditures, subject to repayment and additional liability if the proceeds are misused.6
The application for a PPP loan requires that a prospective recipient attest to eligibility,
verify certain financial information, and meet other legal qualifications.7 The SBA allows
lenders to rely on prospective recipients' certifications and documentation to determine
whether to originate PPP loans. Similarly, the SBA allows lenders to rely on loan
recipients' certifications and documentation in determining whether to forgive PPP
loans. Lenders are held harmless for recipients’ failure to comply with program criteria if
they act in good faith and comply with relevant statutory and regulatory requirements.8
A PPP loan bears a non-compounding interest rate of one percent and matures in five
years.9 The recipient must generally make the first repayment in 24 weeks after the
loan disbursement. If, however, the recipient applies for forgiveness of any portion of
the loan within 10 months following the 24 weeks after the disbursement, the repayment
of the principal (and interest) is not due unless and until the SBA notifies the recipient
that the forgiveness request is rejected.10
B. Qualifying forgiveness of a PPP loan
Qualifying forgiveness occurs in the PPP if the PPP loan recipient satisfies the
forgiveness criteria set forth in 15 U.S.C §§ 636m and 636(a)(37)(J), the participating
lender forgives the PPP loan in whole or in part, and the forgiveness amount does not
exceed the full principal amount of the PPP loan. While the term “qualifying
forgiveness” does not appear in the statute or regulations, for purposes of this
memorandum, it reflects PPP loan forgiveness that is authorized by 15 U.S.C. §§ 636m
and 636(a)(37)(J) and that is described in the aforementioned IFRs. To receive
qualifying forgiveness on a PPP loan, at least 60 percent of the PPP loan amount must
be used for payroll costs, while up to 40 percent of the PPP loan amount may be used
for other specified costs.11 In addition, the qualifying forgiveness amount may not
exceed the sum of specified costs that were incurred and paid during a covered
5 Consolidated IFR, Part III, B.1.a through 1.g., 2.a. through 2.c., 86 Fed. Reg. 3692, 3695-3698. See
also 15 U.S.C. § 636(a)(36)(D), (a)(37)(A)(iv).
6 Consolidated IFR, Part III, B.11, 86 Fed. Reg. 3692, 3704-3705. See also 15 U.S.C. § 636(a)(36)(F).
7 Consolidated IFR, Part III, B.12.ix, 86 Fed. Reg. 3692, 3706. See also 15 U.S.C. § 636(a)(36)(G).
8 Consolidated IFR, Part III, A, C.3, 86 Fed. Reg. 3692, 3694, 3707-3708. See also 15 U.S.C.
§ 636(a)(36)(G).
9 Consolidated IFR, Part III, B.5 and B.6, 86 Fed. Reg. 3692, 3703.
10 Consolidated IFR, Part III, B.9, 86 Fed. Reg. 3692, 3703-3704.
11 Consolidated IFR, Part III, B.9, 86 Fed. Reg. 3692, 3706-3707. See also 15 U.S.C. § 636m(d)(8).

POSTS-124403-21 4
period.12 The specified costs consist of payroll costs, interest on covered mortgage
obligations, covered rent obligations, covered utility payments, covered operations
expenditures, covered property damage costs, covered supplier costs, and covered
worker protection expenditures.13
To receive qualifying forgiveness of a PPP loan, a PPP loan recipient must submit the
application, including documentation and representations required by the statute and by
the SBA.14 To request forgiveness of a PPP loan, the loan recipient must attest to
eligibility for forgiveness, including 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.
Once the lender grants qualifying forgiveness to a PPP loan recipient in compliance with
the terms, conditions and processes of the PPP, the lender may treat the amount
forgiven as "canceled indebtedness." The SBA, as the guarantor, is required to remit
the same amount to the lender within 90 days from the date when the lender approves
the qualifying forgiveness.15 If the SBA later determines that a given forgiveness was
not a qualifying forgiveness, the SBA may seek repayment of the loan.16 Civil and
criminal remedies (including recoupment of the improperly forgiven amount) are also
available in coordination with the Department of Justice. See, e.g., SBA Inspector
General Report no. 22-13 (May 26, 2022).
Section § 636m(i)(1) of the United States Code, Title 15, provides that “no amount shall
be included in the gross income of the eligible recipient by reason of forgiveness of
indebtedness described in subsection (b)”. Similarly, § 276(b)(1) of the CTRA 2020,
which was enacted as Subtitle B of Division N of the Consolidated Appropriations Act,
2021, Public Law 116-260, provides that "no amount shall be included in the gross
income of an eligible entity (within the meaning of [15 U.S.C. § 636(a)(37)(J)]) by reason
of forgiveness of indebtedness described in clause (ii) of such paragraph, . . . " 134
Stat. 1182, 1979 (Dec. 27, 2020).
Situation
Taxpayer X applied for and received a first draw PPP loan in 2020. Taxpayer X did not
use the loan proceeds for eligible expenses and applied for forgiveness of the PPP loan
in 2020 as if she were entitled to a qualifying forgiveness. In the loan forgiveness
12 Consolidated IFR, Part III, B.9, 86 Fed. Reg. 3692, 3706-3707; IFR on Loan Forgiveness, Part IV, 86
Fed. Reg. 8283, 8286-8294. See also 15 U.S.C. § 636m(a)(4)(covered period), (b). For the PPP Second
Draw Loans, the same terms and conditions of qualifying forgiveness are provided at 15 US.C.
§ 636(a)(37)(J).
13 Consolidated IFR, Part III, B.9, 86 Fed. Reg. 3692, 3706-3707; IFR on Loan Forgiveness, Part IV, 1, 3
and 4, 86 Fed. Reg. 8283, 8286-8290. See also 15 U.S.C. § 636m(b).
14 IFR on Loan Forgiveness, Part IV, 2, 86 Fed. Reg. 8283, 8287-8288. See also 15 U.S.C. § 636m(e).
15 IFR on Loan Forgiveness, Part IV, 2.a, 86 Fed. Reg. 8283, 8287-8288. See also 15 U.S.C.
§ 636m(c)(3).
16 IFR on Loan Forgiveness, Part V, 1.e., 86 Fed. Reg. 8283, 8295.