Congress should step in and clarify that business expenses paid with forgiven Paycheck Protection Program (PPP) loans should be deductible in the next round of coronavirus legislation, according to one group.
If Congress doesn’t overturn the IRS’s position on the matter, small businesses may be hit with a surprise tax bill on their PPP loan expenses next year, the American Institute of CPAs said in a July 20 letter to lawmakers.
The loan program was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), enacted March 27, and gave employers options for paying their workers during the COVID-19 pandemic.
Those options include the PPP and an employee retention credit that provides a fully refundable credit against the employer’s portion of payroll taxes. However, only $10,000 in wages per employee can be counted for all calendar quarters, and the credit is capped at $5,000 per employee.
An employer must forgo that credit if it wants to apply for a PPP loan, and it has to jump through several other hoops to qualify for the loan. But if an employer qualifies and a specific portion of the proceeds is used to fund payroll costs over the specified period after the loan is received, it will be forgiven on a tax-free basis.
There was confusion after the CARES Act became law over whether businesses that receive loans that are later forgiven could deduct expenses paid with the tax-free proceeds. The IRS in late April issued Notice 2020-32, 2020-21 IRB 837, which said to the extent that the income resulting from loan forgiveness under the PPP is excluded from income, it’s considered a “class of exempt income” under regulations promulgated under section 265.
The AICPA is urging Congress to overturn that result legislatively.
Because forgiveness is the crown jewel of PPP loans, Congress should pass legislation that requires the Small Business Administration and Treasury to provide or certify free and public PPP loan forgiveness calculators, the AICPA said. The group has come up with its own loan forgiveness calculator that can help taxpayers understand the complex process.
The AICPA isn’t alone in asking for PPP changes. Treasury Secretary Steven Mnuchin said the Trump administration is advocating for a reauthorization of the PPP in the next relief package. The program is set to expire in August and still had over $130 billion in funds available as of July 10.