Tags: Taxes PPP Loans

As the end of the year draws near there is newfound hope and optimism that 2021 will be better for individuals and businesses alike. Two different COVID-19 vaccines have already been approved by the Federal Drug Administration and are making their way to our health care workers and others deemed at high risk.

Before we can turn to the optimism of 2021, there is some last-minute business that Congress needs to urgently address and take care of in 2020 in order to ensure it doesn’t have detrimental short term and long-term impacts to businesses. Congress needs to enact legislation that includes a technical correction addressing the tax treatment of loan forgiveness under the Paycheck Protection Plan (“PPP”).

When originally enacted the PPP was (and continues to be) a lifeline for businesses who struggled due to COVID-19. The PPP was a loan program intended to provide emergent cash flow help for up to eight weeks and is backed by the Small Business Administration. What made the PPP even more appealing to business owners (especially small businesses) was the potential to have their loans forgiven, provided that a majority of the funds were spent on expenses related to payroll, mortgage interest, utilities, and rent (with the majority spent on payroll).

In the rush to get PPP funds into the hands of struggling businesses, Congress unfortunately did not address how the Internal Revenue Service should treat those funds. As a result of that oversight and the SBA and the government now reviewing requests to have PPP loans forgiven, questions by business owners are bubbling up with regards to how the IRS should ultimately view the money. Essentially the question posed is if a business meets the criteria for having their PPP loan forgiven, should the IRS tax the money they received to get through the Pandemic?

While the answer should be “No” as that was not Congress’ original intent, it’s a little more complex than that.

When originally drafted the CARES Act articulated that any forgiven loan under a PPP loan application wouldn’t be included within the borrower’s taxable income. That meant that a company would not have to pay any taxes on the money it received as the intent of the loan was to provide businesses with the money to keep running and continue paying employees, not to create a tax burden for businesses receiving the funds.

Despite Congress’s clear intent, the IRS issued Notice 2020-32, which specified that “no deduction is allowed under the Internal Revenue Code…if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the [CARES Act].” The effect of this ruling is to transform tax-free loan forgiveness into taxable income, raising the possibility of a business’s taxes to increase up to 37 percent when they file their taxes for 2020.

This and other recent IRS Revenue Rulings create a renewed sense of urgency for Congress to address this issue before the end of the year. Allowing the IRS position to remain unchallenged will result in a significant tax increase on small business owners already suffering from the effects of COVID-19 shutdowns. This tax will hit small business owners after their PPP loan has already been spent, and just as many states are re-imposing mandatory closures of thousands of businesses in the face of spiking numbers of COVID-19 cases.

So what can and should be done? Congress has the authority and ability to rectify this position taken by the IRS. However, they need to act before the end of the year. Income tax filing season for 2020 is rapidly approaching, and businesses need to understand tax consequences so they can properly plan. The Goosmann Law Firm is encouraging its clients and all other businesses who took PPP loans to write their congressman and senators and ask that they pass legislation to allow tax deduction of business expenses paid with PPP funds.

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