Better Late Than Never: IRS Releases 1099 Reporting Guidance Impacting 2020 Season

January is in full-swing as businesses and software filers scramble to prepare Forms W-2, 1099, 1098 and other information returns to issue to recipients by the end of this month. As the deadline approaches for what is arguably the busiest month of tax season, the IRS released Notice 2021-06 impacting 1099’s that your company may be planning to issue.

Background

Banks and other service providers administering Small Business Administration (SBA) loan programs are required to issue Forms 1098, 1099 and other tax statements to borrowers of those loans. The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided, among other things, loan subsidies to borrowers of specific SBA loans such as the Paycheck Protection Program (PPP) loans, SBA 7(a) loans, and others. Lenders received the subsidies and applied the funds directly to outstanding principal and interest due on specific borrower loan accounts. Other provisions of the PPP provided appropriations for ‘forgiveness of debt’ for eligible borrowers who could establish specific qualifying criteria. Still other CARES Act relief consisted of grants for eligible student borrowers in certain emergency situations. 

In their haste to get relief passed for small businesses, congress failed to address the tax consequences. As a result, many of the CARES Act and subsequent legislative ‘relief payments’ are reportable as taxable income to the borrower.

At the end of last month, the Consolidated Appropriations Act of 2020 was passed and included Section 279 which provided the IRS authority to waive the requirement to issue and file certain information returns. 

Notice 2021-06 describes the returns in scope for relief from 2020 reporting.

Form 1099-C – debt forgiveness reporting

Although the IRS notified the industry in Announcement 2020-12 that Form 1099-C reporting was not required for forgiven amounts associated with PPP loans; Internal Revenue Code Section 6050P requires lenders to report even when the debtor is not subject to income tax. 

With the tax reporting issues from the last economic crisis still lingering, banks sought to get clearer guidance in advance of tax reporting season. In August, the American Banking Association (ABA) implored the Senate Finance Committee to address the Form 1099-C reporting implications of the PPP. 

In Notice 2021-06, the IRS specifically grants lenders relief from the requirement to issue Form 1099-C for affected SBA loans from the CARES Act and the Economic Aid Act.

Form 1099-MISC and Form 1098 – reporting of loan subsidies

Loan subsidy amounts apportioned to borrowers of some of the SBA loan programs were not specifically excluded from income tax in the CARES Act. The SBA released an information notice in early December, directing SBA lenders to report Form 1099-MISC for all amounts applied to principal, interest and/or fees related to SBA 7(a), 504 and microloans. The ABA initially responded that the guidance was not in line with how banks interpreted the CARES Act and information reporting requirements.

In Notice 2021-06, the IRS grants relief to lenders from the requirement to report Forms 1099-MISC for a variety of loan subsidy and grant amounts apportioned in the CARES Act and the Economic Aid Act.

In the same information notice, the SBA indicated that lenders should report interest paid amounts in Box 1 of Form 1098. This guidance contradicts the IRS instructions for Form 1098 which specifically indicates “do not report mortgage interest received from any governmental unit”. 

In Notice 2021-06, the IRS specifically indicates that payers should include interest paid amounts associated with the SBA subsidy payments in Box 1 of Form 1098. Section 1112 of the CARES Act provides that borrowers can deduct interest amounts associated with these SBA loans, and the IRS highlighted that if a lender fails to report the amounts, it could result in the borrower receiving a CP2000 mismatch notice. 

Further, Notice also clarified that grant monies received by colleges and universities and applied to student tuition and related expenses is reportable on Form 1098-T Tuition Statement.

The guidance in Notice 2021-06 is welcome relief given the uncertainty surrounding so many transactions and the downstream impact to so many taxpayers.