Your Business Credit

SBA loan forgiven during the pandemic? You’ll be getting a 1099

The federal government will consider SBA loans forgiven under the CARES Act as taxable income. Here's what you need to know


Many small business owners were excited to get six months of relief from paying their SBA loans under the CARES Act. But the government has decided to consider the forgiven loan amounts as taxable income. Here’s how you can prepare for this unexpected tax bill.

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Many small business owners were excited to find out they were getting six months of relief from paying their SBA loans under the CARES Act, starting in April.

Both active and new borrowers with 7(a), 504 and microloans received the holiday from payments, authorized under Section 1112 of the CARES Act. The payments were completely forgiven. (This SBA procedural notice explains how the program worked.)

But the payments weren’t exactly free money, as many entrepreneurs hoped. On Dec. 8, the SBA notified lenders and loan intermediaries to send a 1099-MISC form to any borrowers for the amount forgiven for principal, interest and fees. This indicates the government is counting the forgiven amount as income to the borrowers.

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SBA decision puts more pressure on small businesses

This decision affects many businesses, given how many loans the SBA issues. In the week of Dec. 4, the SBA reported $3.8 billion worth of 7(a) approvals for fiscal 2020, $1.2 billion worth of 504 loan approvals and $18.6 million in Community Advantage loans, aimed at underserved communities.

This may not be the government’s final word on this issue. We’re likely to see more discussion as Congress continues to try to break its stalemate over a new stimulus package.

The government’s decision to block businesses from deducting expenses covered with forgivable Paycheck Protection Program loans covered under the CARES Act has prompted a lot of pushback from the business community, such as this letter sent on Dec. 3 by a coalition of business groups.

Some small business owners are saying they did not expect the additional tax expenses and will go under if they have to cover any additional costs after the ongoing financial strain of 2020. This latest decision on other types of government loans could put pressure on businesses that are already struggling.

See related: PPP spending is not tax deductible. Now what?

What to do if your loan was forgiven

In the meantime, if you received loan forgiveness on a microloan or a 7(a) or 504 loan, you’ll need to be prepared. Speak with your tax professional to get an idea of how much you will owe in taxes for 2020.

Perhaps there is some year-end tax planning you can do now to reduce your taxable income and offset the additional charges. Also, consider deferring any planned spending to maximize the cash you have available to pay your tax bill.

It’s a tough time to be a small-business owner right now but hopefully, as the new coronavirus vaccines roll out, it will get easier to generate the revenue you need. In the meantime, staying on top of your finances, including the taxes you owe, is crucial.

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