Menu
Tax Notes logo

Small Business Loan Deduction Bill Puts Ball in IRS’s Court

Posted on May 7, 2020

A bipartisan group of lawmakers introduced legislation clarifying their intent to make business expenses associated with the Paycheck Protection Program (PPP) deductible as they continue negotiations with the IRS.

The Small Business Expense Protection Act of 2020 (S. 3612) would clarify that the receipt of funds through the small business loan program under the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) does not affect the tax treatment of ordinary business expenses.

“When we developed and passed the Paycheck Protection Program, our intent was clearly to make sure small businesses had the liquidity and the help they needed to get through these difficult times,” Senate Finance Committee Chair Chuck Grassley, R-Iowa, said in a May 6 statement.

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

The guidance immediately caused an uproar among lawmakers, who accused the IRS of misinterpreting the legislation. “Treasury's guidance barring deductions for expenses paid by PPP loans is a gut punch for businesses struggling to stay afloat,” Finance Committee ranking member Ron Wyden, D-Ore., said.

However, Treasury Secretary Steven Mnuchin said in a May 4 interview that to interpret the legislation otherwise would allow companies to double-dip.

The new bill would do enough to fix the problem, according to Samuel D. Brunson, a professor at Loyola University Chicago School of Law. “This bill would codify the legislative intent several senators have written about to the IRS,” he said.

But not everyone agrees that the uproar over the IRS’s interpretation is justified. Steve Rosenthal of the Urban-Brookings Tax Policy Center said the double-dip allowed through the measure contravenes long-standing tax law. “There are better ways to help ‘small business’ than to permit double-dips,” he said.

Talks With IRS Ongoing

While the bill clarifies that Congress wants expenses associated with the small business loan program to be tax deductible, it remains to be seen whether lawmakers will be able to include the language in the next relief package or if the IRS will act first.

Finance Committee member John Cornyn, R-Texas, who helped draft the bill, told Tax Notes that “negotiations with the IRS are ongoing” regarding whether the agency will repeal the guidance or release another notice reflecting Congress’s intent.

“The bill was to send a message that we intended to make [PPP loans] tax deductible,” Cornyn said.

Cornyn said he doesn’t have a preference whether to see the IRS fix its mistake or to include the bill’s language in another relief package. “Either way we get it done — as long as we get it done — will be fine with me,” he said.

But simply retracting the notice won’t be enough, according to Richard L. Reinhold, a Cornell Law School professor. “What you really need is to have the Service put out a superseding notice,” he said.

Brunson agreed, telling Tax Notes that simply retracting the language would leave uncertainty. “While [the IRS] could retract the guidance, I really think additional legislation is the cleanest move,” he said.

Copy RID