By: Alan Zgoda, CPA, and Derek Gray, CPA
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed into law on March 27, 2020, provided stimulus to the U.S. economy through a variety of methods. One significant method was in the form of the Small Business Administration (SBA) being authorized to pay up to six months of debt relief on certain SBA loans. Those subsidies included payments of principal, interest, and any associated fees for borrowers.
Loans covered under this piece of the CARES Act include all SBA 7(a) and 504 loans, as well as Microloans. SBA 7(a) loans are the SBA’s primary means of providing assistance to small businesses (less than 500 employees amongst other requirements).504 loans are used for property, plant, equipment, and improvements. Microloans are smaller in amount, up to $50,000 for small businesses and certain not-for-profits.
Consolidated Appropriations Act of 2021
The second-round stimulus bill, effective since December 27, 2020, included the COVID-related Taxpayer Relief Act of 2020 (COVID-TRA). This act states that the six months of debt relief payments from the SBA for the loans listed above are completely tax-free to the recipients. Additionally, those who receive the tax-free subsidies on their loans can still use the interest that was paid off by the SBA to receive a deduction.
This led to questions as to how to report the subsidy payments, or if they should even be reported at all.
Reporting Subsidy Payments
On February 8, 2021, the IRS issued Notice 2021-06, providing clarity on reporting under COVID-TRA. Per the notice, neither the lender of the above loans nor the SBA needs to report the subsidies paid-out to the IRS or the borrower. These subsidy payments would typically be reported on a Form 1099-MISC, but in this case, the proceeds are tax-free, and no reporting is required. A Form 1098 would still be issued for interest payments since any interest paid by the SBA is still deductible. However, this Form 1098 would still include any subsidized interest and in no way be reduced.
If you have any questions about SBA subsidies and their tax consequences, please reach out to your local Blue & Co. Advisor or feel free to contact the authors at:
Alan Zgoda, CPA
Derek Gray, CPA