AICPA and trade associations call on Congress to fix deductibility of PPP loans
In a letter of December 3 addressed to majority and minority leaders in the US Senate and leaders in the House of Representatives, several hundred national professional associations, including the AICPA, and many state and regional affiliates have called on Congress to adopt a law this year rescinded the IRS’s processing of expenses borrowed funds under the Paycheque Protection Program (P3P) that are ultimately canceled. The AICPA and more than 50 state-owned CPA corporations also sent a same-day letter to the same recipients urging that deductibility of PPP expenses be included in any year-end legislation to be passed.
The PPP, created under the law PL 116-136 on aid, relief and economic security of the coronavirus (CARES), authorized loans to certain companies affected by the COVID-19 pandemic. If businesses use their PPP loans for certain qualifying business expenses, part or all of the loan may be forfeited, subject to certain tests. Article 1106 (i) of the CARES Act explicitly excludes the cancellation of PPP loans from gross income.
However, the IRS subsequently issued guidance (Notice 2020-32 and Rev. Rul. 2020-27) stating that no deduction is allowed under the Internal Revenue Code for an expense that is otherwise deductible. if the payment of the expense results in a forgiveness of a PPP loan because the income associated with the forgiveness is excluded from gross income for Code purposes under section 1106 (i) of the CARES Act.
In the letter, the groups warned that “[t]The effect of this decision is to transform tax exempt loan remission in taxable income, raising the specter of a surprise tax increase of up to 37% on small businesses when they file their taxes for 2020 ” (emphasis in original).
As the letter pointed out, many P3 loan recipients kept their employees on their payroll even though they had little work to do, thus serving the program’s intention to keep people employed. Then the IRS made its rulings, which business owners now see as a surtax on their workforce.
Therefore, Congress has been called upon to act before the end of 2020. “This tax will hit small business owners. after their PPP loan has already been spent, and just as many states are reimposing the mandatory shutdowns of thousands of businesses in the face of the growing number of COVID-19 cases, ”the letter said.
– Sally P. Schreiber, JD, (Sally.Schreiber@aicpa-cima.com) is a JofA senior editor.