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Top Taxwriters Urge IRS to Reconsider PPP Tax Deduction Stance

Posted on May 6, 2020

IRS guidance denying a tax deduction for expenses associated with the Paycheck Protection Program (PPP) counters Congress’s intent in creating the small business loan program, three tax committee leaders told the administration.

In a May 5 letter to Treasury Secretary Steven Mnuchin, Senate Finance Committee Chair Chuck Grassley, R-Iowa, ranking member Ron Wyden, D-Ore., and House Ways and Means Committee Chair Richard E. Neal, D-Mass., said the position taken by the IRS “ignores the overarching intent of the PPP.”

Notice 2020-32, 2020-21 IRB 1, released April 30, says that to the extent the income resulting from loan forgiveness under the PPP is excluded from income, it’s considered a “class of exempt income” under regulations promulgated for section 265.

But that isn’t what Congress intended to do when it created the small business loan program as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), the lawmakers said. “Providing assistance to small businesses, only to disallow their business deductions as provided in Notice 2020-32, reverses the benefit that Congress specifically granted by exempting PPP loan forgiveness from income,” the letter says.

The lawmakers said section 1106(i) of the CARES Act was meant specifically to exclude loan forgiveness from income to provide a tax benefit to small businesses that receive a loan. “Had we intended to provide neutral tax treatment for loan forgiveness, Section 1106(i) would not have been necessary,” the lawmakers said.

The lawmakers also criticized how the IRS analyzed section 265(a), saying that a deduction is not “allocable to the exempt income resulting from the forgiven loan.”

The letter comes a day after Mnuchin defended the guidance in an interview with Fox News, arguing that it prevents companies from double dipping. He said he reviewed the guidance personally.

Legislation Coming

Grassley, Wyden, and Neal asked the IRS to reconsider its notice but stopped short of telling the administration that Congress will offer legislation to clarify its stance. But Grassley said May 4 that legislation was in the making. Meanwhile, fellow Finance Committee member John Cornyn, R-Texas, introduced a bill to reverse the IRS guidance, his spokesperson told Tax Notes.

Separately, Rep. Lizzie Fletcher, D-Texassaid in a statement that she will introduce legislation to supersede the IRS guidance and make expenses associated with the loan program tax deductible.

“The IRS guidance issued last week goes against Congressional intent of the CARES Act and will create an additional cost for small businesses that are already struggling through these hard times,” Fletcher said. The bill is expected to be released by May 8.

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