Loan forgiveness or tax deductibility, you can’t have both.
It’s the latest guidance from the Treasury Department and the IRS, which clarified last week that the tax treatment of expenses where a Paycheck Protection Program (PPP) loan has not been forgiven by the end of the year the loan was received.
Since businesses are not taxed on the proceeds of a forgiven PPP loan, they said, the expenses are not deductible. This results in neither a tax benefit nor tax harm since the taxpayer has not paid anything out of pocket.
If a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not. Therefore, we encourage businesses to file for forgiveness as soon as possible.
In the case where a PPP loan was expected to be forgiven, and it is not, businesses will be able to deduct those expenses.
“Today’s guidance provides taxpayers with greater clarity and flexibility,” Secretary Steven Mnuchin said in a statement. “These provisions ensure that all small businesses receiving PPP loans are treated fairly, and we continue to encourage borrowers to file for loan forgiveness as quickly as possible.”
Industry and Congressional outrage
Members of Congress immediately responded. Senate Finance Committee Chairman Chuck Grassley, R-Iowa, and Ranking Member Ron Wyden, D-Ore., released a joint statement criticizing the guidance.
“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,” it said. “As we’ve stated previously, Treasury’s approach in Notice 2020-32 effectively renders that provision meaningless.
“Regrettably, Treasury has now doubled down on its position in new guidance that increases the tax burden on small businesses by accelerating their tax liability, all at a time when many businesses continue to struggle and some are again beginning to close. Small businesses need help maintaining their cash flow, not more strains on it.”
Retirement plan industry advocates also criticized the guidance.
“Really? So we are trying to keep struggling small businesses afloat and then we tell them the relief we gave them is taxable income,” American Retirement Association CEO Brian Graff posted to LinkedIn. “So ridiculous. ARA is working to fix this nonsense. We recently discussed it with House Ways and Means Chairman Neal at an ARA PAC event, and he said he was looking to fix this in the next COVID relief package. So, stay tuned.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
