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ADA, others urge Congress to ensure expenses paid for with PPP funds are tax deductible

August 05, 2020

By Jennifer Garvin

Washington — The ADA and more than 180 other organizations are urging lawmakers to ensure borrowers in the Paycheck Protection Program are eligible for tax-deductibility for expenses paid for with the program funds.

In an Aug. 4 letter, the groups told leaders of the House and Senate that when the Paycheck Protection Program was adopted as part of the Coronavirus Aid, Relief, and Economic Security, or CARES Act, Congress made clear that loan forgiveness under the program would be excluded from the borrower’s taxable income.

“Specifically, a recipient of a Paycheck Protection Program 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 cancelled indebtedness excluded from the borrower’s taxable income,” the organizations said.

For proof, they pointed to the taxability section of the CARES Act, which states “for purposes of the Internal Revenue Code of 1986, any amount which (but for this subsection) would be includible in gross income of the eligible recipient by reason of forgiveness described in subsection (b) shall be excluded from gross income.”

The groups said that publication of IRS Notice 2020-32 “effectively overturned this policy” by denying PPP borrowers the ability to deduct “the same expenses that qualified them for the loan forgiveness” in the first place.

“Defenders of the IRS’ position argue that allowing businesses to deduct these expenses would result in business owners receiving a ‘double’ benefit,” the coalition said. “This is simply untrue. Congress intended for the loan forgiveness under the Paycheck Protection Program to be tax-free. The IRS Notice reverses that position and eliminates any benefit, let alone a double benefit. If a business has $100,000 of Paycheck Protection Program 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) becomes moot if the IRS Notice is allowed to stand.”

If Congress does not reverse the IRS guidance, the coalition said it believes it will lead to hardship for many struggling businesses.

“More than 5 million businesses have participated in the Paycheck Protection Program. More than $520 billion has been lent,” they said. “In nearly all cases, these businesses have already spent the loan proceeds keeping employees on payroll and meeting other necessary costs.”

The organizations also said that denying deductible wages would have other negative consequences and posed the following three questions:

• “How would the denial of deductible wages affect the 199A deduction or the Work Opportunity Tax Credit?”
• “How do you offset expenses incurred in 2020 with loan forgiveness realized in 2021?”
• Does “disallowed interest expense avoid the excess business interest expense limitation?”

“The correctness of the IRS’s reasoning underpinning Notice 2020-32 is a debatable point and if left intact it will certainly result in extensive legal challenges. What is not debatable, however, is congressional intent regarding the tax treatment of these forgiven loan amounts. As part of the next round of COVID- 19 relief, we request that Congress reaffirm its intent and restore the tax benefits it intended to give distressed Main Street businesses as part of the CARES Act,” the letter concluded.

For more information about the ADA's advocacy efforts during the COVID-19 pandemic, visit ADA.org/COVID19Advocacy.