by Scott Lewis, CPA, MSA
Late last night, in a display of bipartisan cooperation, Congress has agreed on a new $900 billion COVID-19 stimulus package. One of the provisions included as part of this legislation package is the formal federal tax treatment of expenses that were incurred using Paycheck Protection Program (PPP) loan proceeds. The bill has deemed these expenses to be deductible, a reversal of the position taken by the IRS earlier this year.
The PPP loans were created and signed into law to provide relief to small businesses during the coronavirus pandemic as part of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, back in March of 2020. They were designed as an assistance measure for small businesses in these times of unprecedented economic uncertainties in the United States.
As part of the CARES Act under section 1106(b), recipients of these loans could receive full or partial forgiveness on this debt for payments made for the following expenses: payroll and salary costs; interest on any covered mortgage obligations; payments on any covered rent obligations; and any covered utility payments. The act specifically exempted all loan amounts that were to be forgiven from gross taxable income.
In early May 2020, the IRS issued Notice 2020-32, stating that although the forgiveness amounts were to be treated as tax exempt income, the above expenses up to the amount of forgiveness would be disallowed as these are allocable to this tax-exempt income. The authority cited by the IRS on this Notice comes from Internal Revenue Code §265 (a)(1). This disallows any otherwise allowable deductions under any provision of the Code, including section 162 (Trade or Business expenses), and section 163 (Interest), for any payment of an eligible section 1106 expense. Otherwise, there would be a double tax benefit, tax-exempt debt forgiveness income and allowable payroll and other covered expense tax deductions.
The American Institute of Certified Public Accountants (AICPA), several hundred trade associations, and other groups, formally issued letters to the leaders of both houses of Congress earlier this month, appealing to them to pass legislation which would reverse this position. They, along with members of Congress have noted that the interpretation by the IRS is contrary to the intent of Congress and would result in unexpected tax bills affecting small business owners.
There are other tax provisions including an approved second round of stimulus checks to be sent to individuals and families, and other measures which we will outline after the bill is signed into law. This current stimulus package is expected to be voted on by both chambers of Congress today.
As to the main summary of a significant tax component within the stimulus deal, Congress has formally reversed the Treasury’s PPP loan expense guidance. It was clarified that the deductibility of expenses paid by PPP small-business loans will be allowed for federal tax purposes, and that PPP loan forgiveness will remain tax-exempt, the original intent of the program. Please note that this only applies for federal tax. Many states have provisions for the treatment of tax-exempt income and must be considered when determining taxable income at the state levels.