Senate Finance Committee Chair Chuck Grassley, R-Iowa, said he is determined to reverse Treasury’s “misguided” decision disallowing deductions for expenses paid for with Paycheck Protection Program loans.
“Congress enacted the PPP to give a financial lifeline to small businesses, not deliver a financial tax liability,” Grassley said in a December 18 Q&A. “The last thing small businesses deserve in 2020 is a lump of coal from the IRS in their stocking.”
With Congress racing to pass another COVID-19 pandemic relief package, Grassley said he will push to include a provision clarifying that expenses funded with forgiven PPP loans are deductible. Lawmakers have introduced bills that would allow businesses to deduct PPP-affiliated expenses.
The PPP, which was created by the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136), has won universal support in Congress and throughout the business community. However, practitioners pointed out after the legislation was enacted that although the forgiven loans are excluded from gross income under the law, it wasn’t clear that expenses funded with forgiven loans could be deducted.
Treasury and the IRS ended the debate April 30 by issuing Notice 2020-32, 2020-21 IRB 837, which said expenses funded with forgiven PPP loans weren’t deductible so as to avoid a double tax benefit. The government doubled down on its position in Rev. Rul. 2020-27, 2020-50 IRB 1552. That November 18 guidance said expenses funded with PPP loans that are later forgiven can’t be deducted in 2020, even if the loan forgiveness occurs in a later year.
Grassley said in his Q&A that the Treasury and IRS position ignores congressional intent to exclude loan forgiveness from taxable income.
“Increasing the tax burden on small businesses already hanging on by a thread to survive is poppycock,” Grassley said. “For example, a small business that used a $150,000 PPP loan to help pay wages and benefits for their employees might now be required to pay approximately $55,500 in federal income taxes due to denied deductions for necessary business expenses. This is bad timing, bad policy and very bad for small businesses.”
In a statement issued late December 18, the American Institute of CPAs said it supports making PPP expenses deductible and cautioned Congress not to adopt a compromise proposal that would only allow deductibility for loans below a certain threshold.
"The threshold, at any amount, encourages the thinking that small PPP borrowers are 'good' and larger PPP borrowers are 'bad.' When the PPP loans became available, companies feared the worst and faced significant economic uncertainty. They should not be penalized for the size of the loan granted by the Small Business Administration," the AICPA said.