To the Editor:
I write to make two points regarding the Paycheck Protection Program (PPP) deductions debate that appear to have been underappreciated. The first point is that if Congress had intended the result of Notice 2020-32, 2020-21 IRB 1, it could’ve simply left out the language that provides that the forgiveness of the PPP loan is not a taxable event. If the forgiveness1 were a taxable event, then the employer would be allowed to deduct the wages (and other deductible expenses) because section 265 would no longer apply. These deductions would cancel out the gross income realized due to the forgiveness. The effect is identical as under the notice — the employer receives no net tax benefit from the payments made using PPP proceeds. Therefore, the notice must interpret the “no taxable event upon forgiveness” language as mere surplusage, which is disfavored in statutory interpretation.2
The second point is that Notice 2020-32 results in inconsistent treatment between employers on one hand and self-employed individuals and service partners on the other. In the employer context, pursuant to the notice, the PPP proceeds that are used to pay wages are taxed once, to the employees who receive the wages. The notice ensures that these dollars are taxed once on a net basis by disallowing any tax benefit to the employer. In the self-employed and partnership context, the PPP proceeds that are used to pay the so-called owner compensation replacement would not be taxed at all. Self-employed individuals do not pay themselves wages, nor do partnerships pay their service partners wages, so there is no gross income inclusion. Notice 2020-32’s disallowance of a deduction has no impact in these contexts because there is no deduction to disallow for these owner compensation replacements. There is no indication in the legislation that Congress intended such inconsistent treatment regarding the same underlying transaction (that is, compensating service providers). To the contrary, one overarching theme of the legislation appears to be consistent treatment among these various types of arrangements.
Sincerely,
Gregg D. Polsky
University of Georgia School of Law
May 7, 2020
FOOTNOTES
1 I would also note that the conventional labeling of the reduction of the borrower’s obligation to repay as “forgiveness” or “cancellation” is not technically correct. The debt is in fact being paid, but not by the borrower. There would therefore be no cancellation of debt income in any case. Instead, there would be gross income under Old Colony Trust principles because the taxpayer’s debt is being repaid by someone other than the taxpayer, unless an exclusion were to apply. Here Congress provided the exclusion in the PPP legislation.
2 Perhaps the language could be viewed as a simplification measure, because instead of deducting the wages and then including the forgiveness income, the notice results in no tax reporting whatsoever. One problem with this interpretation is that it seems clear that Congress intended the language to have substantive effect.
END FOOTNOTES