IRS Says Small Business Loans Are Taxable Income

Last week, the Internal Revenue Service (IRS) issued Notice 2020-32, which announced that business expenses that are normally tax deductible but are expected to be forgiven as part of loans provided in accordance with the Small Business Administration’s (SBA) Paycheck Protection Program (PPP), a part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, are not tax deductible after all. 

However, Section 1106 of the CARES Act, which describes the loan forgiveness aspect of the PPP, states that amounts forgiven pursuant to a PPP loan “shall be excluded from gross income,” if such amounts would be included in gross income absent the loan forgiveness. Therefore, the IRS notice seems to reverse the position Congress took in crafting the CARES Act. By making typically deductible expenses non-deductible if they are paid using a PPP loan that is later forgiven, the IRS is changing at least some of a forgiven PPP loan into taxable income. The IRS notice appears to be in direct conflict with the language of the CARES Act.

House Ways and Means Chairman Richard Neal (D-MA), Senate Finance Chairman Chuck Grassley (R-IA) and Senate Finance Ranking Member Ron Wyden (D-OR) expressed their opposition to the IRS notice in a letter to Treasury Secretary Steve Mnuchin, who has endorsed the IRS interpretation.

PIA National weighed in by joining a coalition letter to Chairmen Neal and Grassley requesting that House and Senate leaders collaborate to correct the discrepancy by amending the CARES Act.

This week, a bipartisan group of senators, including Chairman Grassley, introduced S. 3612, a bill to clarify that, for purposes of the Internal Revenue Code, receipt of coronavirus assistance does not affect the tax treatment of ordinary business expenses. PIA National strongly supports this legislation.

A similar bill is expected to be introduced in the House by freshman Representative Lizzie Fletcher (D-TX). Policymakers are also discussing the development of another, broader COVID-19-related relief bill, which could provide a vehicle for a section that would codify Congress’s intent on this issue.

PIA National will continue to work with members of the administration and Congress to support S. 3612 and additional measures to aid small businesses.