PPP Interest paid by SBA

[Bessy]

How do we report interest the SBA paid on PPP loans? Is that interest deductible? Is it reportable in the same manner as the forgiveness of the PPP principal amount?

[JRC]

Yes deductible

Yes Forgiven

[Bessy]

Thank you, can you please provide the reference as to where I can find that information? I been doing some research, but I could not find specific information about the deductibility of PPP interest paid by the SBA? Thank you! 

[qbteachmt]

Are you sure what the SBA paid was the PPP interest? Or, was it Small Business Debt Relief payments?

"Established by the CARES Act and revised by the Economic Aid Act, the SBA is authorized to automatically pay 6 months of principal and interest, and any associated fees that borrowers owe for all 7(a), 504, and Microloans (excluding PPP loans and EIDL loans) up through September 27, 2020 even if not fully disbursed.

The borrower did not need to apply for this assistance.

https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/sba-debt-relief"

There also was EIDL loan repayment and Bridge loan repayment:

https://gpwcpas.com/grant-credit-loan-and-other-relief-comparison-chart/

I've seen PPP forgiveness, but not SBA payments for that interest. I can keep looking, though.

[qbteachmt]

This is what I found, and it explains that the SBA pays off the Lender, and that will include interest. The SBA is not paying interest as such on that loan, for your taxpayer. From the perspective of your taxpayer, the loan is being Forgiven, not paid on their behalf.

"SBA Procedural Notice 5000-812316
• Lender of Record in the Platform/ETRAN makes request and follows instructions
in the Platform
• If Lender made both First Draw and Second Draw loans, Lender may
simultaneously request guaranty purchase for both PPP loans, if appropriate
• Lender will provide the principal balance and accrued interest and upload
official transcript of account, which should be based on a pay-off date within 10
days from the date of guaranty purchase submission
• At the time of guaranty purchase, SBA will pay accrued interest through
the payment deferment period plus up to a maximum of 120 days of additional
interest due to payment default"

What matters is, did your taxpayer pay interest that was not refunded to them? I've seen where people mention the banker sent them that amount back, when the loan got forgiven.

[Bessy]

Thank you for you answer, clients are bringing the SBA Notices of PPP forgiveness payments for the year in which the loan was forgiven. The letters state the amount the SBA remitted to pay the principal and the interests of the PPP loan. According to Rev Proc 2021-48, a taxpayer that received a PPP loan my treat tax-exempt income resulting from the partial or complete forgiveness of such PPP loan as received or accrued: (3) When the PPP loan forgiveness is granted. 

I am not sure if the interest forgiven is tax deductible even if it was not paid by the taxpayer, and if it should be treated as tax-exempt income, and reported according to Rev proc 2021-48. 

Thank you so much for all the help you can provide. 

[Bessy]

Ok, thank you. So, what amount should be reported as tax-exempt income on schedule M1? The total amount remitted by the SBA to the lender which includes principal + interest, or only the amount of the principal? Can taxpayer deduct the interest remitted to the lender by the SBA?  

[qbteachmt]

"I am not sure if the interest forgiven is tax deductible even if it was not paid by the taxpayer,"

As I noted and provided links for, the SBA payments to the lender for servicing PPP is not under any of the provisions that would allow for that interest as the borrower's expense.

You asked for evidence and I can find none for what you propose. I find plenty for not doing it.

[sjrcpa]

"what amount should be reported as tax-exempt income on schedule M1? The total amount remitted by the SBA to the lender which includes principal + interest, "  Yes

"Can taxpayer deduct the interest remitted to the lender by the SBA?"  Yes  No

[qbteachmt]

"Can taxpayer deduct the interest remitted to the lender by the SBA?"

Again, we are reviewing forgiven PPP. That part between the lender and the SBA does not involve the borrower.

It might be helpful to consider that the forgiven amount would have been reported on 1099-C under typical operations, as the Borrowed amount forgiven. Not including the amount(s) to service the loan. The SBA is "underwriting" the loan, in other words.

[qbteachmt]

@sjrcpa 

I see we disagree, for purposes of forgiven PPP? Everything I've supported and seen and found does not provide for the borrower to write off interest on a forgiven PPP loan. Can you provide links I have not provided?

[dd4vols]

Maybe you are merging 2 different situations.  If a client has an SBA loan in force, then the payments mde on behalf of them are deemed made by the borrower. I.E, the interest paid on those SBA loans are deductible. The interest paid by SBA to the banks on PPP loans is not deductible..  

[sjrcpa]

I guess not. I thought I read that somewhere but a quick search termed up nothing.

So I may be  am wrong. I haven't dealt with it on a tax return yet.

[sjrcpa]

Thank you @dd4vols 

You jogged my memory. That's what I read. 

I'll edit my bogus post.

[qbteachmt]

With all the programs out there, these little details matter. SBA made lots of payments against loans, even to themselves! But the PPP interest isn't one of those that is an expense for the part of the PPP Loan that was changed from Loan to Forgiven. That's why some banks are having to give back interest paid to the borrower who wasn't sure they would get or even apply for forgiveness, so they made a few interest payments and then got their forgiveness after all.

And I believe this plays directly into the late IRS guidance that if you reasonably expect your PPP Loan to be forgiven, you could report it as such.

"Rev. Proc. 2021-48 covers the timing of receipt of PPP forgiveness tax-exempt income. Taxpayers may treat such income as received or accrued when either (1) expenses eligible for forgiveness are paid or incurred; (2) an application for PPP loan forgiveness is filed; or (3) PPP loan forgiveness is granted. The revenue procedure also describes adjustments that must be made on an amended return; information return; or, for certain partnerships, an administrative adjustment request, when a PPP loan is only partly forgiven."

[Bessy]

Thank you everyone for your help! I know how to handle it now.