SBA Information Notice:

SUBJECT: Tax Issues Relating to the Payments Made on Behalf of Borrowers under Section 1112 of the CARES Act 

In April 2020, as part of the CARES Act, the SBA began making the SBA loan payments (Section 1112 payments) to cover principal, interest, and any associated fees for 6 months. The SBA released an Information Notice dated December 8th, 2020 that the debt relief will be taxed as income. 

The Information Notice states that the SBA lenders who provided the debt forgiveness payments for both SBA 7a and 504 loan programs will be responsible for filling Form 1099 to the borrowers who received the debt forgiveness as Miscellaneous Income.

The notice sites IRS code section 6041 and the regulations thereunder, in respect to the Section 1112 payments. The total amount received of Section 1112 payments will be reported as income to the borrower. For 504 loans, in respect to Form 1098, Mortgage Interest Statement, the amount of the interest paid on the loan by the Section 1112 payments should be reported to the IRS.

While the CARES Act specifically states that the amount of debt forgiven under PPP is not taxable for Federal income tax purposes, this will not apply to the Section 1112 payments.

This will of course impact advisors slightly differently depending on the tax bracket they're in and how many months of debt forgiveness was received in 2020 compared to 2021. 

Receiving taxable income is better than no income benefit received at all, but we're disappointed that the SBA went this direction, no matter how much we understand the reasons of why they did. 

Perhaps congress will look at addressing this in the next stimulus package being currently discussed. But in this case, it will literally take an "act of congress" to nullify this requirement.

We'll be following this closely and will send out any important updates on this topic to our clients.