September 22, 2020
IRS announces no reporting forgiven PPP loans on Forms 1099-C
In Announcement 2020-12, the IRS has clarified that lenders should not file Forms 1099-C, Cancellation of Debt, to report the amount of qualifying forgiveness of covered loans made under the Paycheck Protection Program (PPP) administered by the Small Business Association.
The CARES Act established the PPP, which allows qualifying businesses to obtain loans guaranteed by the Small Business Association. Those loans will be forgiven if certain conditions are met, and forgiven amounts will not be includible in the borrower's gross income for tax purposes.
IRC Section 6050P generally requires a lender that discharges debt to report the amount discharged on a Form 1099-C, regardless of whether the amount discharged represents gross income to the borrower for tax purposes. In the Preamble to the final regulations under IRC Section 6050P (and in the annual instructions to the Form 1099-C), however, Treasury and the IRS said that no penalty will apply for failure to file Forms 1099-C for amounts forgiven under the terms of the debt obligation until further guidance is issued.
In Announcement 2020-12, the IRS confirmed that the lender is not required to, and should not, file a Form 1099-C with the IRS or furnish one to the borrower as a result of the qualifying forgiveness when all or a portion of the stated principal amount of a PPP loan is forgiven because the borrower satisfied the forgiveness requirements under the loan. The Announcement notes that filing such information returns could result in the issuance of underreporter notices and confusion for borrowers.
EY observes: Announcement 2020-12 is welcome relief to the banking industry. While some institutions were comfortable not reporting amounts forgiven due to the penalty relief language in the Preamble and the instructions, others were gearing up to report. As noted by the IRS, such reporting would have confused borrowers, been a drain on the banks' resources and resulted in inconsistent reporting across the industry.