Jessica L. Jeane, J.D.
Director of Public Policy & Strategic Communications
December 7, 2020
The National Society of Accountants (NSA) attended on behalf of NSA members the U.S. Small Business Administration’s (SBA) Office of Advocacy December 4 Tax Roundtable discussion on the Paycheck Protection Program (PPP). The overarching consensus among guest speakers and attendees was that the IRS and Treasury’s guidance on PPP deductibility is burdensome to small businesses and not congruent with congressional intent for the forgivable loan program.
“This is going to be a surprise for a lot of small businesses and kind of a trap for the unwary,” Tom West, principal in KPMG US’s Washington National Tax practice Passthroughs group, said of the IRS guidance prohibiting deductions of expenses. Prior to Joining KPMG, West served in the U.S. Treasury’s Office of Tax Policy as Tax Legislative Counsel where he developed and reviewed policy, legislation, regulations, and other public guidance dealing with domestic federal tax law, including aspects of the 2017 federal tax reform legislation such as Section 199A. Additionally, West served as the acting Assistant Secretary for Tax Policy.
Further, West remarked upon the “logical fallacy” of Notice 2020-32, stating that, “congressional intent is fairly clear - if [Congress] expected to not provide this benefit [deductibility of expenses paid for with a forgiven loan], it wouldn’t have said that forgiveness is tax exempt.”
The PPP, created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, (P.L. 116-136), provided forgivable loans to eligible small businesses, certain non-profit organizations, veteran’s organizations, Tribal business concerns, independent contractors, and self-employed individuals adversely impacted by the COVID-19 pandemic. Most recently, the IRS and Treasury under Rev. Rul. 2020-27 have taken the position that if a business reasonably believes a PPP loan will be forgiven, expenses related to the loan are not deductible, regardless of whether the business has yet filed for forgiveness. The Revenue Ruling released this month not only doubles down on the administration’s stance against deductibility of expenses in regard to a forgiven PPP loan, as first announced in Notice 2020-32, it further clarifies that regardless of when loan forgiveness is requested or granted, if forgiveness is reasonably expected, any covered expenses paid for with loan proceeds are not deductible. Treasury Secretary Steven Mnuchin has credited the guidance with preventing “double dipping.”
Additionally, West discussed what he called “a flaw in IRS reasoning,“ adding that, “there are those who position it as a ‘double’ benefit…I don’t think about it that way; I think of that as the intended benefit, not a double benefit,” West said. “Congress should be commended for seeing the bigger issue,” he added. Congress, in clearly stating that loan forgiveness would not be taxable, thus did not intent to “claw back the benefit that was just given to taxpayers and small businesses,” by the IRS and Treasury then disallowing the deduction of expenses allocable to tax-exempt income, according to West.
Adding to the discussion, Jared Walczak, vice president of state projects with the Center for State Tax Policy at the Tax Foundation, alluded to how the IRS’s and Treasury’s guidance undercuts the purpose of the PPP. “It clearly isn’t double dipping the way we colloquially think about this. The intention of [the PPP] is to provide a lifeline, and without this [deductibility] provision, you’re carving up a significant percentage of it,” Walczak said.
Looking ahead, enacting year-end PPP legislation to clarify congressional intent in favor of PPP deductibility has both strong momentum and bipartisan support on Capitol Hill. The Senate’s top tax writers, Senate Finance Committee Chairman Chuck Grassley, R-Iowa, and Ranking Member Ron Wyden, D-Ore., have criticized Treasury’s latest PPP guidance on deductibility as missing “the mark.”
“Since the CARES Act, we’ve stressed that our intent was for small businesses receiving [PPP] loans to receive the benefit of their deductions for ordinary and necessary business expenses,” Grassley and Wyden said in a recent joint statement. “We explicitly included language in the CARES Act to ensure that PPP loan recipients whose loans are forgiven are not required to treat the loan proceeds as taxable income. As we’ve stated previously, Treasury’s approach in Notice 2020-32 effectively renders that provision meaningless.”
A PPP-revival measure to provide certain small businesses with a second round of loans is expected on Capitol Hill to be included within a fiscal year 2021 appropriations package. However, it remains to be seen whether the deductibility issue will be addressed. Several lawmakers have expressed optimism that similar legislative language to Sen. John Cornyn’s, R-Tex., bipartisan Small Business Expense Protection Act, (S. 3612), which would clarify congressional intent that ordinary business expenses paid with forgivable PPP loans are deductible, could make it into a year-end government funding bill. Grassley and Wyden are both cosponsors of Cornyn’s bill, among over 30 other bipartisan senators.
NSA supports bipartisan legislative efforts on Capitol Hill to clarify legislative intent under the CARES Act that expenses paid with forgivable PPP loans are deductible.
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NSA presents this information in the interest of its members for information purposes only and is not intended to provide, nor should it be relied upon, as legal, tax, or accounting advice.