Fact check: Post about taxes and Paycheck Protection Program loans is missing context

Ella Lee, USA TODAY
·4 min read

The claim: PPP loans must be reported on tax returns

It's tax season, and thanks to the COVID-19 pandemic, thousands of businesses have a new type of loan to consider while filing.

The Paycheck Protection Program, a cornerstone of the CARES Act, provided loans to small businesses to help them stay afloat during the first year of the COVID-19 pandemic. But some social media posts imply the loans came with a cost.

"PPP LOANS MUST BE REPORTED ON THE TAX RETURN," reads a Feb. 7 Facebook post, shared more than 350 times in four days."smh the GAME just changed."

Commenters on the post had mixed reactions, some interpreting the post as businesses needing to acknowledge PPP loans on their tax returns and others questioning whether businesses must report the money they took out as taxable income.

"Report it you want and if you don’t gone (sic) to jail," one commenter wrote.

Another commenter wrote, "If u got one it better be included with dem w2s."

But experts told USA TODAY it's not that simple. No loans need to be reported as income, because there is an expectation they will be paid back. Though forgiven or canceled loans are typically taxable, PPP loans are federally tax-exempt if used properly. However, some states may tax forgiven PPP loans.

In response to USA TODAY'S request for comment, the post's creator, Kristie Fuller, reiterated the claim made in the post and said her post was misunderstood by other social media users.

"A lot of people were in a uproar claiming it was false claim however I never said it was apart (sic) of the income you report," she said.

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Loan proceeds not included as taxable income

For those questioning whether the PPP money they borrowed must be reported as taxable income, the answer is simple.

"The claim, as quoted, is false," said Bryan Camp, a professor of tax law at Texas Tech University, in an email. "As the Supreme Court explained in Commissioner v. Tufts, loans are never income when received because there is an expectation that they will be repaid. So if a taxpayer pays back the PPP loan, there is nothing to report as income."

Karen Brown, a tax law professor at George Washington University, affirmed that, writing in an email to USA TODAY that "proceeds from a loan are not included in income for federal income tax purposes."

The rules are a little different when loans are forgiven, because canceled debt is typically taxable, according to the Internal Revenue Service. But PPP loans are tax-exempt regardless of whether the loan has been forgiven.

More: IRS is 'buried' in paper backlog, creating tax season anxiety so high that even tax pros want relief

"The PPP was designed to allow taxpayers who properly used PPP loan proceeds – and were thus discharged of the obligation to repay – to not have to report that discharge of indebtedness as income," Camp said. "Bottom line: If the PPP loan was properly used and properly forgiven, then the taxpayer need not report that forgiveness as gross income. "

Using at least 60% of the PPP funds to make payroll during the lockdown phase of the COVID-19 pandemic is considered "proper use."

The fact the loan was discharged still has to be reported, but the income itself is exempt from tax when used correctly, Brown said.

Some states may tax forgiven PPP loans

A number of states may require income tax payments on forgiven PPP loan amounts, despite the fact that the federal government won't.

For example, Nevada, Utah, North Carolina and Florida taxed all forgiven PPP loans in 2020, according to the tax policy nonprofit Tax Foundation. California, Rhode Island and Virginia taxed some businesses' forgiven PPP loans, and both Washington and Ohio taxed forgiven PPP loans in some instances.

The reason some states will tax forgiven PPP loans while the federal government won't is because of state income tax laws, according to Forbes.

PolitiFact first reported on the claim.

USA TODAY reached out to the IRS for comment.

Our rating: Missing context

Based on our research, we rate MISSING CONTEXT the claim that PPP loans must be reported on tax returns, because without further context it could be misleading. Loans don't need to be reported as income when received, because there is an expectation they will be paid back. PPP loans are federally tax-exempt if used properly, but some states may tax forgiven PPP loans.

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This article originally appeared on USA TODAY: Fact check: PPP loans aren't reported as taxable income, experts say