Will Turbotax handle forgiven PPP loan? (2024)

FAQs

How do I report PPP loan forgiveness on Turbotax? ›

Under PPP loan forgiveness rules, borrowers do not need to include the forgiven portion of the loan as taxable income. This differs from other types of forgiven debt, for example, foreclosures or canceled debt, which you must report as taxable income, often receiving a 1099-C, Cancellation of Debt Income.

Borrowers must meet requirements for PPP loan forgiveness

If taxpayers meet certain requirements, the loans are forgiven. Generally, forgiven loans are taxable as discharge of debt income. However, a taxpayer may exclude from income the cancelled amount of an eligible PPP loan.

PPP Loan Audit After Forgiveness

The SBA may audit a borrower's PPP loan up to six years after the loan is forgiven. The PPP loan audit after forgiveness is conducted to ensure that the borrower has used the loan funds for eligible expenses and complied with all the rules and regulations of the PPP loan program.

Forgiveness of PPP loan proceeds should be recorded as income from continuing operations, as a separate line item. of loan forgiveness from the U.S. government is received.

Your lender is responsible for notifying you of the forgiveness amount paid by SBA and the date on which your first payment will be due, if applicable. Borrowers who need assistance with direct forgiveness can contact SBA at our dedicated forgiveness call center: 877-552-2692.

Forgiven PPP loans are considered "Other Tax Exempt Income" for federal purposes and will be reported on Schedule K-1 box 16B (S-corporations) or 18B (partnerships). This amount increases the shareholder's or partner's basis. Enter the amounts on the Passthrough K-1's screen as they were reported on your client's K-1.

In general, if you have cancellation of debt income because your debt is canceled, forgiven, or discharged for less than the amount you must pay, the amount of the canceled debt is taxable and you must report the canceled debt on your tax return for the year the cancellation occurs.

Forgiven PPP loan proceeds is reported on Schedule M-1 as income on books not on return.

Are PPP expenses tax deductible for the self-employed if they are forgiven? Yes. PPP expenses are both forgivable and deductible, and, even better, whatever amount is forgiven will not be considered to be part of your taxable income.

What are the new rules for PPP loan forgiveness? ›

Follow The 60/40 Rule

We've already established that PPP funds can be used to cover payroll expenses and other qualifying costs. However, to achieve full forgiveness, you must follow the 60/40 rule. This means: At least 60% of PPP funds must be spent on qualifying payroll expenses.

Will I pay taxes on my PPP loan forgiveness? While the IRS usually treats forgiven loans as taxable income, the CARES act specifies that the forgiven loan amount is not to be included in taxable income. This means that you will not pay independent contractor taxes on the loan when it was received or forgiven.

IRS Criminal Investigation (IRS CI) is continuing to target Paycheck Protection Program (PPP) loan recipients in 2023.

Who will be audited? PPP loans in excess of $2 million are automatically triggered for an audit by the SBA. The SBA has created a safe harbor for any PPP loan borrower that, together with its affiliates, received loans of less than $2 million.

Possible violations that could trigger a PPP fraud investigation include: Making false statements on your PPP loan application. Using the loan funds for purposes other than those allowed by the PPP guidelines. Falsifying your employee headcount or payroll expenses. Failing to maintain proper documentation.

The Government Loan Payable liability account is debited for the amount forgiven (to reduce the balance of the liability), and Other Income – Loan Forgiveness revenue account is credited for the amount forgiven (to recognize the amount forgiven as income).

But there was a way to remedy those early errors: Deny forgiveness. That could have thwarted scam artists and forced businesses that prospered to repay the money. Yet nearly three years after the rollout of PPP, the vast majority of loans have been forgiven.

The extinguishment of debt income would be a permanent difference, as it would never be taxable. Therefore, no related income tax expense. The expenses incurred would provide a reduction in income tax liability. Therefore, there would be an income tax benefit at the appropriate statutory income tax rate.

What happens if your PPP loan is flagged? ›

If the SBA flags your PPP loan, they may request a federal search warrant. Usually, this is where the investigation into fraudulent PPP loans begins. If your PPP loan has been flagged, it is critical that you immediately seek legal counsel from an experienced PPP loan fraud attorney.

Per Form 1065 instructions for Schedule K, line 18b, a statement regarding the PPP loans needs to be included with the return. To enter information for the required statement, use the K-4 screen, in the Schedule K folder. It will also be included in the electronic file.

Schedule M-2. According to the latest Form 1120-S instructions, expenses paid with forgiven PPP loans should be reported on Schedule M-2 line 5, column D.

Amounts of PPP loans that are forgiven must be reported on Form 990-EZ, Part I, line 1 as contributions from a governmental unit in the tax year that the amounts are forgiven.

If you receive a 1099-C, you may have to report the amount shown as taxable income on your income tax return. Because it's considered income, the canceled debt has tax consequences and may lower any tax refund you are due.

Forgiveness, cancellation, or discharge of your loan means that you are no longer required to repay some or all of your loan.

Even if you receive a Form 1099-C from a lender, you still may be able to avoid taxation on the forgiveness of a debt. If your debt was discharged in a Title 11 bankruptcy proceeding, such as a Chapter 7 or Chapter 13 case, you're not responsible for taxes on that debt.

The instructions for Form 1120S provide that the tax-exempt income from the forgiveness of PPP loans should be reported on Line 16b of Schedule K, Form 1120S and Schedule K-1 of Form 1120S.

Your adjusted gross income (AGI) is one of the factors that determine your eligibility for student loan forgiveness. If your AGI was less than $125,000 as an individual in 2021 or 2020, you are eligible.

Since the forgiveness of a PPP loan results in tax-exempt income, AAA will not be increased by the amount forgiven; instead, OAA will be increased. An exception exists to the rule that nondeductible expenditures reduce AAA.

Are PPP loans under 50k automatically forgiven? ›

Under the IFR, PPP borrowers of $50,000 or less are exempted from any reductions in forgiveness based on: Reductions in full-time-equivalent (FTE) employees; and. Reductions in employee salary or wages.

You can use the PPP funds to pay yourself through what's called owner compensation share or proprietor costs. This is to compensate you for a loss of business income. To take the full amount of owner compensation share, you will have to use a covered period of at least 11 weeks weeks.

The 8/24 Rule states that any individual with a 5% or more “ownership stake” is an “owner”.

Borrowers can apply for a Second Draw PPP Loan until March 31, 2021, through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, eligible non-bank lender, or Farm Credit System institution that is participating in PPP.

Income exclusion

For California purposes, forgiven PPP loans, SVO grants, and RRF grants are excluded from gross income.

As a self employed individual, your owner compensation replacement will count as payroll for the PPP. This means you can put the full loan amount as both your payroll expense and the amount you're requesting forgiveness on.

What Is the Maximum Amount of Loan Forgiveness You Can Get? As discussed above, compensation through the PPP for any worker is capped at $100,000. Therefore, for self-employed workers, your loan amount is based on a maximum compensation of $100,000.

How is the PPP loan forgiveness amount calculated? Your PPP loan may be 100% forgiven if you spend at least 60% on allowable payroll costs and not more than 40% on allowable non-payroll costs that were incurred or paid during your Covered Period.

Your loan amount will ultimately be the determining factor of whether or not your loan will be audited. However, the SBA has the right to audit any PPP loan of any size.

Do I have to report PPP loan forgiveness on taxes? ›

Under PPP loan forgiveness rules, borrowers do not need to include the forgiven portion of the loan as taxable income. This differs from other types of forgiven debt, for example, foreclosures or canceled debt, which you must report as taxable income, often receiving a 1099-C, Cancellation of Debt Income.

Loan proceeds received under the Paycheck Protection Program (PPP) are not taxable income, regardless if the loan was forgiven or not. Forgiven PPP loans are not considered cancellation of debt income, and as such, you should not report these loan proceeds on your tax return.

Who gets audited by the IRS the most? In terms of income levels, the IRS in recent years has audited taxpayers with incomes below $25,000 and above $500,000 at higher-than-average rates, according to government data.

The short answer to this question is: "yes." If a portion (or all) of your PPP loan was forgiven improperly, you may be subject to IRS penalties as well as potential civil and criminal prosecution.

Generally, if you are flagged for PPP fraud, you will be contacted by a federal agent from a law enforcement agency or other federal authorities regarding your loan under the CARES Act. Your bank might also inform you that your bank accounts have been frozen or seized as part of investigations into PPP Loan fraud.

It is important for PPP loan recipients to remember that SBA audits and federal fraud investigations are not exclusive of one another. In other words, an SBA PPP audit can potentially trigger an investigation by the SBA-OIG, FBI, DOJ, and/or IRS.

Schedule M-2. According to the latest Form 1120-S instructions, expenses paid with forgiven PPP loans should be reported on Schedule M-2 line 5, column D. Since these deductible expenses would usually be classified in Column A, we are awaiting clarification from the IRS.

The amount should be reported as tax-exempt income on your tax return. It would show up on line 16(a) of schedule K on a form 1120-S and line 18(b) on schedule K of form 1065.

Statement to include in the return

An S corporation that has tax-exempt income resulting from the forgiveness of a PPP loan must attach a statement to their return titled "RP2021-48" including the following information about each loan received: The S corporation's name, address, and EIN.

In general, if you have cancellation of debt income because your debt is canceled, forgiven, or discharged for less than the amount you must pay, the amount of the canceled debt is taxable and you must report the canceled debt on your tax return for the year the cancellation occurs.

Is PPP loan forgiveness on M 1? ›

If the PPP Loan has been forgiven. The adjustment will be shown on your M-1 as a book-tax adjustment. This adjustment would go on Line 5 of the M-1. If the PPP loan has not yet been forgiven, you would not enter this adjustment, but add a liability item for the amount of the PPP loan.

To report PPP loan forgiveness as book income on Schedule M-3. To enter book income not included on the tax return when preparing Schedule M-3, use the appropriate fields in the Income (Loss) section of Screen M3-2 in the Balance Sheet folder.

Option 1: Treat the Loan as Debt

When you treat your PPP loan as debt, it's recognized as a financial liability (with interest accrued) on your balance sheet. The amount received from the SBA should be shown as a cash inflow from financing activities.

Divide your eligible annual payroll costs by 12 to determine your average monthly payroll costs, then multiply by 2.5. This is your PPP loan amount.

Whatever accounts you decide to use, debit your bank account for the amount of the loan and credit your liability account for the amount of the loan. If you separate funds, your bank account will be a special PPP loan bank account.

Amounts of PPP loans that are forgiven must be reported on Form 990-PF, Part I, line 1 as contributions from a governmental unit in the tax year that the amounts are forgiven.

Owners of 5 percent or more of an S corporation who are also employees are eligible for Payroll Protection Plan (PPP) loan forgiveness of up to 20.83% of their employee cash compensation (capped at $20,833; maximum salary of $100,000 times 20.83%), with cash compensation defined as it is for all other employees (Box 1 ...

According to the IRS, nearly any debt you owe that is canceled, forgiven or discharged becomes taxable income to you. You should receive a Form 1099-C, "Cancellation of Debt," from the lender that forgave the debt.

The guidance confirms that, when 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.

Are forgiven SBA loans taxable income? ›

Are forgiven SBA loans taxable income? In most cases, forgiven SBA loans (such as PPP and EIDL) are not counted toward your taxable income on the federal level. However, state laws vary, so make sure you understand your state laws regarding whether or not SBA loans are taxable.