In a letter dated Aug. 4, 2020, the AICPA joined over 170 organizations to urge Congress to “include a technical correction addressing the tax treatment of loan forgiveness under the Paycheck Protection Program (PPP)” in its next round of legislation addressing the coronavirus pandemic.
The letter, addressed to House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Mitch McConnell, R-Ky., explained, “When the PPP was adopted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, [P.L. 116-136,] Congress made clear that any loan forgiveness under the program would be excluded from the borrower’s taxable income. Specifically, a recipient of a PPP loan was eligible for forgiveness of indebtedness for amounts equal to certain payroll, mortgage interest, rent, and utility payments made during a prescribed period, with any resulting canceled indebtedness excluded from the borrower’s taxable income.”
Nonetheless, despite Congress’s intent, the IRS issued Notice 2020-32 denying tax deductions for amounts paid under the PPP that were forgiven, claiming that treatment was necessary to prevent taxpayers from receiving a double benefit. But the coalition letter explains that is not true. As an example, it mentions a business that has $100,000 of PPP loans forgiven and excluded from its income, but then is required to add back $100,000 of denied business expenses. The result is the same as if the loan forgiveness was fully taxable. Section 1106(i) of the CARES Act becomes moot if Notice 2020-32 is allowed to stand.
The letter also noted that, aside from the significant tax increase of about $100 billion that many struggling businesses will face as a result of the IRS’s mistaken interpretation, businesses are now also recognizing other issues raised by the IRS’s position.
Those issues include how the denial of deductible wages would affect the Sec. 199A deduction or the work opportunity tax credit; how taxpayers would offset expenses incurred in 2020 with loan forgiveness realized in 2021; and how disallowed interest expense would be treated under the excess business interest expense limitation under Sec. 163(j).
Edward Karl, CPA, CGMA, AICPA vice president–Taxation, noted that “many small businesses are still in economic distress, and we urge members of Congress to take action to ensure that the necessary corrections are included in the next relief package.”
For more news and reporting on the coronavirus and how CPAs can handle challenges related to the pandemic, visit the JofA’s coronavirus resources page.
For tax-related resources, visit the AICPA’s COVID-19: Tax resources page.
— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.