If Congress doesn't step in and overturn IRS guidance denying deductions funded with forgiven Paycheck Protection Program loans, businesses will be hit with a surprise tax bill, according to one group.
The American Institute of CPAs urged its members to pressure lawmakers to settle the matter of whether expenses are deductible when PPP loans are involved. If Congress doesn’t act soon, the issue could hurt businesses trying to plan for next year.
“CPAs are now assisting business and individual clients with year-end tax and cash flow planning which is critical not only for filing 2020 returns, but also to determine their operating needs for 2021; planning in the midst of coronavirus-induced economic uncertainty is particularly important,” Edward S. Karl of the AICPA said in a November 23 statement.
The group has for months been urging lawmakers to pass legislation on the matter, but it’s raising it again for its members in light of Rev. Rul. 2020-27, 2020-50 IRB 1, released November 18. In that ruling, the IRS said expenses funded with PPP loans can’t be deducted if the borrower reasonably expects the loan to be forgiven.
That’s true regardless of the year in which the loan is actually forgiven, the IRS said.
The PPP was created by the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136), which was enacted in March and provides loans that can be forgiven tax free if portions of the proceeds are spent on items such as payroll.
Immediately after the PPP was created, practitioners noted that it wasn’t clear whether expenses funded with PPP loans would be deductible if the loans were forgiven, but the IRS quickly issued Notice 2020-32, 2020-21 IRB 837, in response. According to that notice, the expenses funded with the forgiven PPP loans weren’t deductible, to avoid a double tax benefit.
After the most recent IRS guidance, the focus has now shifted to Congress to make the change.
“Members of Congress must act now and pass this legislation to ensure that struggling businesses and their owners can recover,” Karl said.
Legislation has already been introduced on the topic: Senate Finance Committee member John Cornyn, R-Texas, has introduced a bill (S. 3612), and House members have floated their own proposals (H.R. 6821, H.R. 6754).