The IRS should rethink its decision to deny tax deductions for ordinary business expenses funded by Paycheck Protection Program (PPP) loans because that guidance isn’t consistent with Congress’s intent, according to the Texas Society of Certified Public Accountants (TSCPA).
In a May 6 letter to the IRS and Treasury, the TSCPA pushed for the withdrawal of Notice 2020-32, 2020-21 IRB 1, which states that allowing the forgivable, tax-free PPP loans to be deducted would create a double tax benefit because the loans are already exempt from income taxes under the Coronavirus, Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136).
The letter, signed by the group’s president and CEO, Jodi Ann Ray, and its Federal Tax Policy Committee chair, David P. Donnelly, states that “with the tax deductibility in question and the varying nature of the representations, some loan recipients may feel justified in not paying employees but rather keeping the funds as a low-interest loan. This was not the intent of Congress or the Act.”
Leadership of the Senate Finance and House Ways and Means committees said congressional intent was that the CARES Act “not limit the deductibility of expenses which were used as a basis for forgiveness of loans made under Section 1102 of the Act,” the letter states. “This is particularly true since Congress provided for forgiveness to not trigger income and elimination of the deduction would negate that benefit,” it added.
The TSCPA also expressed support for the Small Business Expense Protection Act (S.3612), introduced by Finance Committee member John Cornyn, R-Texas, which would allow PPP loan borrowers to deduct expenses paid for by the loan.
On May 5 Finance Committee Chair Chuck Grassley, R-Iowa; ranking member Ron Wyden, D-Ore.; and Ways and Means Committee Chair Richard E. Neal, D-Mass., sent a letter to Treasury Secretary Steven Mnuchin pressing the department to reconsider Notice 2020-32 “in light of congressional intent and the importance of maximizing liquidity for businesses receiving PPP loans to survive and recover from the ongoing health crisis.”
“Providing assistance to small businesses, only to disallow their business deductions as provided in Notice 2020-32, reverses the benefit that Congress specifically granted by exempting PPP loan forgiveness from income,” the taxwriters’ letter says.
The PPP loan program is a part of the CARES Act, enacted March 27, that gave employers the option to keep workers on the payroll, and if a specific portion of the loan is used for payroll costs during the eight-week period following the issue of the loan, it will be forgiven tax free.
The relief program is largely seen as an alternative to the CARES Act employee retention tax credit because the two are mutually exclusive legally.