Congress is set to award billions of dollars in tax deductions to business owners who were recipients of Paycheck Protection Program (PPP) loans—in addition to forgiveness of the loans.
The hotly contested tax deduction is a provision in the $900 billion economic relief package slated for passage Monday which would clarify that PPP loan recipients could write off expenses such as employee salaries that have been covered by forgiven PPP loans. After months of unsuccessful negotiations, the relief measure with the PPP tax deduction was added to a $1.4 trillion omnibus spending bill that funds the federal government through next September.
The critical deduction contradicts the U.S. Treasury Department and the IRS, which said last month that business owners who “reasonably believe” their PPP loans will be forgiven can not deduct the costs.
The position at the Treasury and IRS has been that since forgiveness of the loan is tax-free, borrowers can’t deduct expenses. On the other hand, lawmakers have proposed legislation that will permit the write-offs.
But Senate Majority Whip Sen. John Thune (R-S.D.) confirmed to reporters Sunday that the bail-out package includes the PPP deduction. According to a GOP aide who spoke on condition of anonymity, there will be restrictions on the deduction but those limits haven’t been specified yet. Full details of the provision, including any limits on the deduction have yet to be released.
Thune and other lawmakers said they want to clarify what Congress intended to do when it created the PPP and prevent unexpected tax bills from hitting business owners who are still struggling from the pandemic.
Under the Treasury decision, a business receiving a $100,000 loan wouldn’t count that as income, but would have to forgo $100,000 in deductions. In many cases, the loss of those deductions is mathematically equivalent to taxing the PPP loan.
Instead, under the proposal now pushed by lawmakers, the $100,000 loan wouldn’t be counted as income and the business could deduct $100,000 in related expenses. For a business owner in the top tax bracket, that is a $37,000 difference and would make the PPP loan more like a tax-free government benefit.
A full deduction could reduce federal revenue by about $200 billion, with a majority going to very high-income households, according to the Brookings Institution. In reality, however, the billions of dollars in tax benefits for business owners aren’t counted as part of the relief package’s cost. That is because the Joint Committee on Taxation, which creates revenue estimates for tax bills, assumed that lawmakers had meant to allow the deductions in March and are just clarifying that intent now.
Some progressive groups and Treasury Secretary Steven Mnuchin have argued that the combination of tax-free income and deductible expenses amounted to double dipping, but the lobbying clout of business groups and senior lawmakers in both parties appears to have prevailed.