The U.S. Internal Revenue Service (IRS) recently published IRS Announcement 2020-12 notifying lenders that they are not required to file IRS Form 1099-C, Cancellation of Indebtedness, reporting the amount of qualifying forgiveness for covered loans made under the Paycheck Protection Program (PPP) administered by the Small Business Administration (SBA). Section 6050P of the Internal Revenue Code and governing regulations require certain entities, including financial institutions, government agencies and organizations in the trade or business of lending, that discharge $600 or more of a borrower’s indebtedness, to file an IRS Form 1099-C and to furnish a copy of the form to the borrower/recipient. However, Announcement 2020-12 clarifies that if all or a portion of the stated principal amount of a loan is forgiven because the recipient satisfies certain conditions for forgiveness under the CARES Act, then the lender is not required to file a Form 1099-C with the IRS or to issue a Form 1099-C to the borrower/recipient. As year-end approaches, the announcement is welcomed relief for lenders struggling to understand their tax reporting obligations and to gather reportable data associated with the potentially high volume of PPP loans that may be forgiven amidst the ongoing economic crisis resulting from the COVID-19 pandemic.
The PPP was created under section 1102 of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) (P.L. 116-136) and generally allows businesses with fewer than 500 employees to borrow up to $10 million. Under the program, if the loan is used for payroll costs and certain conditions are satisfied, a borrower may be eligible for forgiveness of all or a portion of the stated principal amount of the loan. Borrowers applying for PPP loans of $2 million or more may also be required to provide additional information. On Oct. 26, 2020, the SBA published a notice in the Federal Register announcing that it is seeking comments on new draft Loan Necessity Questionnaires (Form 3509 (For Profit Businesses) and Form 3510 (Not for Profit Businesses)) for PPP borrowers receiving loans of $2 million or more. Refer to our prior alert on the SBA Loan Necessity Questionnaire.
While the SBA has not finalized the questionnaires, it is currently soliciting comments on them as it is likely that certain responses or explanations provided by borrowers may be taken into account when evaluating loan eligibility for forgiveness under the CARES Act which will, in turn, drive Form 1099-C reporting requirements for lenders. Therefore, it is important that lenders implement internal controls and procedures now for collection and review of documentation evidencing the borrowers’ eligibility for forgiveness and the loan’s exclusion from 1099-C reporting. Lenders may also need to modify their systems to timely flag loans and borrowers eligible for forgiveness. To the extent that Forms 1099-C are required, the forms will be due on or before January 31 of the year following the calendar year in which an identifiable event (e.g., loan forgiveness) occurs.
For more information on RSM’s tax information reporting please see PPP and CARES Act planning services.