What the Congress giveth in the business Paycheck Protection Program (PPP), the IRS may taketh (a portion) away. Unless Congress giveth back.
As it stands, the IRS is coming, and its hand is out.
If you’re a business owner who took out a PPP loan from the Small Business Administration (SBA) to help with payroll, rent, utilities, or other eligible expenses in this COVID-19 environment, you’ve probably been heartened by the SBA’s moves in the areas of loan forgiveness.
You’re probably thinking, “You can’t be serious!” Unfortunately, it’s as serious as an IRS agent at audit time.
In normal times, when a lender forgives an unpaid loan, the borrower is considered to have income equal to the forgiven loan amount. This Cancellation of Debt, or “COD” income, exists as long as the borrower isn’t bankrupt or insolvent. Under the CARES Act (Coronavirus Aid, Relief, and Economic Security), Congress said that forgiven PPP loans would not be considered COD income. Essentially, forgiven PPP loans become tax-exempt income for borrowers.
However, Congress failed to consider long-standing tax law that expenses are not deductible when used to produce tax-exempt income.
The IRS quickly issued notice 2020-32, and followed it up more recently with Revenue Ruling 2020-27. if the funds expended are used to obtain forgiveness of your PPP loan, this ruling “… disallows any otherwise allowable deduction under any provision of the Code.”
Essentially, the forgiven loan is taxable income for the business borrower. As it stands – at the moment – a business can’t deduct expenses used to obtain loan forgiveness if the business received a PPP loan, spent the entire amount on eligible expenses, and either expects, or has received, PPP loan forgiveness.
The IRS’s stated position is that no deduction for such expenses is allowable in 2020, even if the PPP loan isn’t forgiven by the SBA until later. Relief may come when, or if, the latest coronavirus aid package is passed by Congress. The bill’s House version has a provision allowing deductibility of these amounts.
In the interim, interested parties can write their members of Congress to point out the problem or suggest their solution. Unless you wish to pay taxes on what Congress intended to be a tax-free aid package, ask that the member support the needed legislative change.
Because the taxman cometh.
This article first appeared in KnoxNews.