If the lender who is lending you the money is depositing what you borrow to your paypal account, then paypal is 100% correct in reporting the transaction. It "is" income that you received, regardless of who you received it from, or why they paid it to you. The "who" and "why" is not paypal's concern and never will be. You can sue all you want. But you will lose.
You need to report the gross amount exactly as entered in box 1a of the 1099-K. Understand that the gross amount is not the taxable amount. You have to take action to reduce the taxable amount, and only you can do that.
IN turbotax where you enter the gross business income, you have 4 data entry lines.
On the first line, enter the total business income received from all sources, including the total amount included in box 1a of the 1099-K.
That does it for the General Income section. Click Continue.
Now click the "income you gave back" button, call it what is is (such as "SBA Loan" maybe) and enter the amount of the borrowed money. Then click Continue.
Now click Continue again, and you'll see the amount next to "Business income" has been reduced by the amount of the borrowed money.
