SBA’s Payments Toward Certain 7(a) Loans, 504 Loans & Microloans Are Nontaxable

SBA’s Payments Toward Certain 7(a) Loans, 504 Loans & Microloans Are Nontaxable

Section 1112 of the CARES Act required the SBA to make payments for a period of 6 months to cover principal, interest, and any associated fees owed by small businesses on certain 7(a) loans, 504 loans, and Microloans. 

The SBA recently issued guidance in response to a provision in the COVID-related Tax Relief Act of 2020 clarifying those payments are nontaxable. The SBA indicated the guidance applies to 7(a) loans purchased and serviced by the SBA, 504 loans, and Microloans serviced by the SBA. 

SBA Information Notice 5000-20087 states, “SBA is also informing Intermediaries, 7(a) Lenders, and CDCs that this exclusion of Section 1112 payments from gross income for purposes of the Internal Revenue Code of 1986 applies to any Section 1112 payments that SBA will make in the future under the extension of the debt relief program authorized by Section 325 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act), enacted December 27, 2020.”

As a result, the information notice also indicates 7(a) lenders and microloan intermediaries are not required to file Form 1099-MISC, Miscellaneous Income, with the IRS, nor are they required to furnish a copy to the small businesses for which the payments were made. 

The Economic Aid Act also revised the eligibility criteria to include all 7(a), 504, and Microloans approved up to September 27, 2020. Contrary to the original guidance, this includes loans that were not fully disbursed by that date. Based on when the loan was approved, varying levels of additional debt relief may be available beginning on or after February 1, 2021, to assist beyond the 6-month period. The SBA has instructed borrowers to contact their lenders to discuss eligibility for this additional assistance. 

Additional business resources may be found on the SBA’s Coronavirus Relief webpage

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Feel free to contact me if you have questions, and visit our COVID-19 Financial Resource and Tax Center for additional information on related matters.

by Holly Ferguson, CPA

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Holly Ferguson joined ARB in 1996 and has been a principal for the firm since 2012. Throughout her career, Holly has provided financial reporting consulting services, assisted with transactional accounting and consulting related to business acquisitions/sales, and analyzed implications and strategic implementation of new accounting standards. As the Practice Leader of ARB’s Accounting & Attest Services Team, she focuses primarily on related services for businesses, manufacturers, credit unions, and nonprofit organizations.

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