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Congress Passes Year-End Bill With Full PPP Deductibility

Posted on Dec. 22, 2020

Congress approved a year-end legislative package that would allow businesses to deduct expenses paid for with Paycheck Protection Program loans, expand the employee retention credit, and send checks to qualifying taxpayers.

The measure (H.R. 133) was divided into two votes, allowing some lawmakers to voice their displeasure with the annual funding of some government agencies. The portion of H.R. 133 that provided relief to businesses and individuals weathering the COVID-19 pandemic was overwhelmingly approved with votes of 359-53 in the House and 91-7 in the Senate.

The final language lawmakers settled on doesn’t restrict business deductions for PPP-related expenses, mirroring what was proposed by Senate Finance Committee member John Cornyn, R-Texas, in the Small Business Expense Protection Act of 2020 (S. 3612).

“By clarifying that expenses paid with a forgiven PPP loan can still be deducted from small businesses’ taxes, we can help ensure small businesses won’t be hit with yet another hardship during an already difficult year,” Cornyn said in a statement.

There were initial concerns that despite its overwhelming bipartisan support, PPP deductibility wouldn’t be included in the bill because of objections raised by Treasury Secretary Steven Mnuchin. The IRS released guidance (Notice 2020-32, 2020-21 IRB 837) in April declaring that expenses funded with forgiven PPP loans weren’t deductible.

House Ways and Means Committee ranking member Kevin Brady, R-Texas, who did not agree with the assessment of fellow lawmakers that Congress intended for PPP-affiliated expenses to be deductible, told reporters there were two truths to the issue.

Brady said that Mnuchin was correct that allowing businesses to deduct expenses paid with PPP loans was double dipping, but he added that businesses could be disadvantaged. “Many small businesses thought it would be deductible,” he said.

Disallowing the deduction would have created more tax obligations next year, and lawmakers were adamant that they should not stick already struggling businesses with higher tax bills, Brady said.

Under the bill, PPP loan recipients would also be able to use the employee retention credit — something they weren’t allowed to do under previous coronavirus relief bills.

“Ensuring businesses can access relief from both programs is critical,” Senate Finance Committee ranking member Ron Wyden, D-Ore., said in a statement. The bill would increase the credit rate from 50 percent to 70 percent and the limit of creditable wages per employee from $10,000 per year to $10,000 per quarter.

Lawmakers also agreed to some relief for military families and federal workers, who now have until the end of 2021 to repay deferred payroll taxes. The fix comes after President Trump signed an executive memorandum creating a payroll tax holiday to increase worker pay during the pandemic. While most private employers chose not to use the holiday, it was mandatory for many federal workers. IRS guidance had given employers only four months to pay back the deferred taxes.

Ways and Means member Donald S. Beyer Jr., D-Va., hailed the inclusion of the provision he had proposed. “I thank the Ways and Means Committee staff for their work on this provision and for making it a priority in negotiations,” he said in a release.

Meal Deduction Returns

The White House also secured a victory with the inclusion of a 100 percent deduction for business meal expenses for 2021 and 2022. The deduction was pushed by Trump and Finance Committee member Tim Scott, R-S.C. and is meant to help struggling restaurants.

Democrats also claimed victory with the inclusion of a special “lookback” for the earned income tax credit and child tax credit. The bill would allow low-income individuals to use their earned income from 2019 to determine the EITC and child tax credit for 2020, helping taxpayers who earned less in 2020 because of the pandemic.

Lawmakers also settled on providing $600 stimulus checks to individuals making up to $75,000, or $1,200 to married couples with incomes below $150,000. Similar payments provided at the start of the pandemic under the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) were twice as much. However, dependents would receive bigger checks under the new bill, getting a bump from $500 to $600.

Brady said the IRS expects to send the stimulus money to taxpayers with direct deposit on file with the IRS by December 31, while paper checks and debit cards will be sent by January 15. The measure also clears up problems seen when checks were sent to dead people following enactment of the CARES Act by clarifying that taxpayers are eligible for a check if they were alive as of January 1, 2020. 

Additional provisions in the bill would extend or make permanent a bevy of long-temporary tax incentives known as the tax extenders and would expand and extend the temporary above-the-line charitable deduction that was enacted in the CARES Act.

The Joint Committee on Taxation estimated that the revenue provisions of the bill would cost $328 billion over 10 years, with half of that cost attributed to the economic impact payments to individuals.

Editor's Note, December 22, 2020: This story was updated to include the JCT revenue estimate.

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