As the coronavirus pandemic forced the United States into a massive state of economic shutdown, the U.S. Congress crafted a bill to assist Americans affected by the virus as well as those affected by its economic impact. This bill, known as the CARES Act, was passed by Congress and signed into law by the president on March 27. It includes a component known as the Paycheck Protection Program (PPP), which was designed to give small businesses forgiveness-eligible loans to keep their employees on the payroll.
While this may seem like a wonderful resource for small businesses, IRS guidance on how these loans affect the businesses’ ability to claim certain valuable deductions has muddled the situation. Our skilled tax professionals have been closely monitoring this rapidly developing situation so that we can offer our clients the most accurate, up-to-date advice.
The PPP loan program provides eligible small businesses that are struggling to stay afloat during the pandemic with short-term loans to keep their staff on the payroll and their business running. The principal amount of a PPP loan will be completely forgiven if the small business submits documentation showing that all of the money went to payroll, payroll-related expenses, rent, and other qualifying expenditures over the eight-week period after receipt of the loan. Laying off employees or cutting salaries will negatively affect what you can receive from this program. The loans are also tax-exempt.
At first blush, this seems like a great deal with no downsides for struggling small businesses. However, the IRS has issued guidance stating that those who have their PPP loans forgiven are not eligible to claim as deductions the wages or other business expenses they used the forgivable portion of the loan to pay for. Many of these deductions are quite valuable and could benefit small businesses during these tough times. Yet, the IRS claims, under a provision of its code that generally forbids deductions for otherwise deductible expenses if they are allocable to tax-exempt income, that allowing taxpayers to keep both the loan and the deductions would amount to a “double tax benefit.”
As such, it is vital that you consult with an experienced tax professional to help assess the particulars of your situation and make sure that taking part in the loan forgiveness program will be financially beneficial to you given the deductions that you may not be able to make.
Bipartisan leaders in both chambers of Congress have indicated that the IRS’ guidance is at odds with intent of the CARES Act to assist small businesses financially through this unprecedented crisis. Congressman Richard Neal, the chairman of the powerful Ways and Means Committee, has stated that the House plans to include language in their next coronavirus relief bill indicating that these deductions are to be preserved for PPP loans.
While there is still a large gap between the parties on what the overall House bill should look like, on May 8, a bipartisan group of Senators introduced a stand-alone bill to allow tax deductions for forgiven PPP loans, indicating that this is a priority for both parties. The bill is sponsored by Finance Committee Chair Chuck Grassley (R), Finance Committee Ranking Member Ron Wyden (D), as well as Senators Marco Rubio (R), John Cornyn (R), and Tom Carper (D), and is known as the Small Business Protection Act. It would clarify the PPP so businesses could deduct the expenses they had paid with a forgiven loan.
“When we developed and passed the Paycheck Protection Program, our intent was clearly to make sure small businesses had the liquidity and the help they needed to get through these difficult times,” Grassley said in a statement. “Unfortunately, Treasury and the IRS interpreted the law in a way that’s preventing businesses from deducting expenses associated with PPP loans. That’s just the opposite of what we intended and should be fixed. This bill will do just that.”
An experienced tax professional can help guide you as to whether this law is likely to apply retroactively if passed or whether the timing of your application might matter in determining what deductions you can make. There are also other programs available that may affect your deductions differently than the PPP, including the expansion of the SBA’s Economic Injury Disaster Loan (EIDL) program, and loans under Section 7(b)(2) of the Small Business Act.
It is clear that the bipartisan intent of Congress was to allow these loans to be forgiven without small business owners having to lose valuable deductions. However, the IRS’ guidance is still in place until such time as this bill is signed into law. If you are considering taking a PPP loan, it is best to discuss your options with an experienced tax lawyer like those at the Tax Law Offices of David W. Klasing. We are keeping abreast of the latest updates and can help you make the smartest decision for the future of your business. To schedule a consultation, call us today at (800) 681-1295.
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