Business Loans

[gats1016]

My clients are an S-corp with a business loan thru their bank.  They have had the loan for a couple of years.  In April they received a letter from the bank saying due to the CARES act the bank, with the help of the SBA would be making payments on the loan for six months.  This is not a PPP Loan nor is it an EDIL.  So for six months a payment of $966.35 was applied to the loan.  For bookkeeping and tax purposes what do I do with this?  Is this debt forgiveness making it taxable income to the shareholders?  How is it written off on the books?  Any guidance would be appreciated.

[sjrcpa]

Yes it is taxable debt forgiveness income. Debit loan payable, Credit other income.

If interest is included:

a. it doesn't reduce the loan balance

b. there's a rule that says this point part isn't taxable because it would give rise to a deduction if they paid it.

[gats1016]

thank you

[sjrcpa]

You're welcome.

[BobKamman]

As part of its coronavirus debt relief efforts, the SBA will pay 6 months of principal, interest, and any associated fees that borrowers owe for all current 7(a), 504, and Microloans in regular servicing status as well as new 7(a), 504, and Microloans disbursed prior to September 27, 2020.  This relief is not available for Paycheck Protection Program loans or Economic Injury Disaster loans. Borrowers do not need to apply for this assistance. It will be automatically provided.

This is from the SBA website, which isn't clear on whether this was part of the CARES Act, or authorized elsewhere.  The government can't just give away money out of the kindness of its heart, can it?  Well, maybe so, according to what I read about student loan forgiveness. 

Still, since there is some question about whether PPP loan forgiveness is taxable, I wouldn't rush to count this (the principal part of the payments) as income.  

[qbteachmt]

"Q: What must be reported as income on the Form 1099-MISC?
A. The total amount of the Section 1112 payments must be reported as income to the
Borrower, including the principal, interest and any fees that were included in the
Section 1112 payments. This total amount should be included in Box 3 of Form
1099-MISC."

From here:

https://content.govdelivery.com/accounts/USSBA/bulletins/2b0409a

And this reference gives the operational details:

https://www.sba.gov/document/procedural-notice-5000-20041-further-guidance-implementation-section-11...

[BobKamman]

Taxpayers aren't bound by SBA opinions.  I would wait until IRS provides guidance, or Congress decides whether to enact legislation that explains what they meant.  Also, I wonder if "cancellation of indebtedness" rules apply here, for insolvent businesses.  The issue is not deductibility of expenses paid with a PPP loan, but taxability of partial loan forgiveness, when there was no obligation to spend the funds on anything else.   

[qbteachmt]

I don't know what is meant by "opinion."

I was responding to this: "This is from the SBA website, which isn't clear on whether this was part of the CARES Act, or authorized elsewhere."

So, that got answered by the link to, "tax Issues Relating to the Payments Made on Behalf of Borrowers under Section 1112 of the CARES Act"

And for this part: "Still, since there is some question about whether PPP loan forgiveness is taxable, I wouldn't rush to count this (the principal part of the payments) as income."

It directs the reporting agent to use this detail, "must be reported as income to the Borrower, including the principal, interest and any fees that were included in the Section 1112 payments. This total amount should be included in Box 3 of Form 1099-MISC."

This was issued "Small Business Administration (SBA) sent this bulletin at 12/09/2020 07:01 AM EST" to lenders and is the directive from the SBA regarding these payments, for 1099-Misc as well as 1098 reporting.

I don't see any "opinion." Until someone passes some sort of law that binds SBA, I see their instructions in those links, clarifying what has been posted here.

[gats1016]

I appreciate every response.  Like everything the government does there is never a definitive answer -there are maybe's and stay-tuned.

The letter the client received from the bank states "The CARES Act passed by Congress enables us to offer an unprecedented (becoming such an overused word) form of assistance with the help of the SBA.  Payments dues on your loan in regular servicing status under the SBA 7(a) program will be made on your behalf by the SBA for six months.  These payments will cover all principal, interest and any associated fees that are owed on your loan in regular servicing status for six months."

The interesting thing (to me) is that the client did not apply for any loan assistance and in fact their business has more than doubled during this pandemic.

[BobKamman]

@gats1016 "The CARES Act passed by Congress enables us to offer . . ."

Shouldn't it be, "requires us to accept government money on your behalf..." ?

[BobKamman]

It's sort of like requiring long-term care payments to be reported by insurance companies,.  Doesn't mean they are taxable.  We have a tax on income, not on pieces of paper.