PIA National has issued an action alert urging Congress to prevent a surprise tax on Paycheck Protection Program (PPP) loan recipients.
Included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act was a provision stating that any portion of a PPP loan that qualified for loan forgiveness “shall be excluded from gross income” for tax purposes. Despite Congress’s clear intent, the Internal Revenue Service (IRS) issued Notice 2020-32, which specified that “no deduction is allowed under the Internal Revenue Code…if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the [CARES Act].”
The ruling by the IRS undercut the clear intent of Congress in the CARES Act and transformed tax-free loan forgiveness into taxable income, raising the possibility of a surprise tax increase of up to 37 percent on small businesses when they file their taxes for 2020. Additionally, the IRS recently issued Revenue Ruling 2020-27, stating that expenses funded through a PPP loan are not deductible for 2020 if the taxpayer expects to receive forgiveness of the covered loan on the expenses it paid or accrued during the covered period, regardless of whether the taxpayer submitted an application of loan forgiveness.
PIA National was joined in a letter by over 500 groups in highlighting to Congress the importance of acting on this issue before the end of 2020. Small business owners should not be taxed on desperately needed relief which the PPP purported to provide tax-free. If this issue is not resolved before the end of the year, the 5 million qualifying businesses that received PPP loans will receive a surprise tax increase when they file their taxes for 2020, providing a potential unrecoverable financial blow for many.