A coalition of more than 170 trade groups is calling on House Speaker Nancy Pelosi (D-CA) and Senate Majority Leader Mitch McConnell (R-KY) to clarify the tax treatment of Paycheck Protection Program forgiveness. Specifically, they want Congress to clarify that businesses are able to use business expenses to offset loan forgiveness.


Without the amended tax treatment, struggling businesses across the U.S. will be subject to $100 billion in taxes, the coalition asserted. So far, the Small Business Administration has processed more than $512 billion in guaranteed small-business loans for five million businesses that have participated in the PPP.


“Denying the correct tax treatment of these loans will result in hardship for many struggling businesses,” the groups said in their letter to lawmakers. 


The coalition is asking lawmakers to change PPP loan forgiveness tax treatment through legislation so that all the expenses a business cited to qualify for a PPP loan can be deducted from income to offset forgiveness. A new Internal Revenue Service bulletin mandates that all PPP loan forgiveness must be reported to the IRS as income and denies the offset, creating $100 billion in new taxes strapped businesses will be forced to pay.


“Millions of businesses across the country received much-needed relief during a time of global crisis and it’s imperative that the receive the full measure of assistance intended by Congress,” American Institute of CPAs vice president of taxation, Edward Karl, said in a statement. AICPA is part of the coalition calling on Congress for the correction.


“Many small businesses are still in economic distress and we urge members of Congress to take action to ensure that the necessary corrections are included in the next relief package,” Karl added.
 
The PPP loans were created earlier this year as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act states that any loan forgiveness under the program would be excluded from the borrower’s taxable income. 


“Although the intent of the CARES Act was clearly to allow the deductibility of expenses related to loan forgiveness, the statute did not clarify IRS treatment,” the coalition said in statement.


Subsequently, IRS published Notice 2020-32, which settled the policy question by specifically denying borrowers the ability to deduct the same expenses that qualified them for the loan forgiveness.


The IRS notice “effectively overturned the intent of the legislation by denying these borrowers the ability to deduct the same expenses that qualified them for the loan forgiveness,” the coalition argued.


The coalition told lawmakers that each recipient of a PPP loan that is eligible for forgiveness should be able to use certain payroll, mortgage interest, rent and utility payments made during a prescribed period to offset any cancelled indebtedness, which would then be excluded from the borrower’s taxable income—tax treatment they assert was made clear in CARES Act.


Bipartisan legislation introduced in May by Senators John Cornyn (R-TX), Ron Wyden (D-OR), Marco Rubio (R-FL), Tom Carper (D-DE) and Chuck Grassley (R-IA) could solve the problem by clarifying that the receipt and forgiveness of coronavirus assistance through the PPP program does not affect the deductibility of ordinary business expenses.


“This legislation will remedy the IRS guidance and allow taxpayers to deduct covered expenses paid or incurred by an eligible recipient of a small business loan that is forgiven pursuant to the CARES Act,” the AICPA said in a comment letter on the legislation.