PPP borrowers will earn tax deductions

Lawmakers say they only want to clarify what Congress intended to do when it created the PPP and prevent unexpected tax bills from affecting employers. Still, a full deduction could cut federal revenue by about $ 200 billion, with a majority for very high-income households, according to Adam Looney of the Brookings Institution, who was an official in the Obama administration. .

There is a bipartisan agreement in Congress to overturn the Treasury’s decision that denied the deductions and frustrated business owners. Some progressive groups and Treasury Secretary Steven Mnuchin argued that the combination of tax-free income and deductible expenses amounted to a double decline, but the influence of business groups and senior lawmakers on both sides contradicts that view. .

“We all hope Congress just clears this up and gets it off the table so our customers can relax,” said Christopher Hesse of accounting firm CliftonLarsenAllen LLP, who is chairman of the tax institute at the American Institute of Accountants certified audiences.

The problem has slowed down since Congress created the PPP in late March. The program offered low-interest loans with the promise of forgiveness if companies continued to pay their workers.

The authors of the law tried to address the possible tax consequences by stating that these forgiven loans, unlike typical forgiven loans, will not be counted as taxable income. But the law was silent on whether companies could still deduct salaries and other expenses financed by loans.

In April, Mr Mnuchin and the Internal Revenue Service said no, denying the deductions.

Lawmakers argued that they intended to allow deductions and that the denial contradicted the purpose of freeing income taxes. But Mr. Mnuchin would not move. Without congressional action, some business owners would likely try to challenge the IRS in court over whether the agency’s rule complies with the tax code, Hesse said.

According to the Treasury’s decision, a company that received a $ 100,000 loan would not count as revenue, but would have to give up $ 100,000 in deductions. In many cases, losing these deductions is mathematically equivalent to taxing the PPP loan.

Instead, according to the proposal pushed by lawmakers now, the $ 100,000 loan would not be revenue and the company could deduct $ 100,000 in related expenses. For a business owner who is within the upper tax bracket, this makes a difference of $ 37,000 and would make the PPP loan more like a tax-free government benefit.

“It simply came to our notice then. Much better things could be done with it, ”said Frank Clemente, executive director of Americans for Tax Fairness, a progressive group that opposes deductibility.

But many Democratic lawmakers support the deductions.

Trade associations organized a campaign to get Congress to overturn Mr. Mnuchin’s decision. Business owners say the goal of the PPP program was to cover these expenses and not provide cash for any use. They note that they had to bear these deductible expenses to obtain the loan forgiveness.

“The government gave us these PPP loans to pay our team. That’s what we did, ”said Janice Jucker, co-owner of Three Brothers Bakery in Houston. She said she faces a $ 100,000 tax bill that would absorb the money she would rather use to open a new location.

“Everyone was so worried about surviving that this wasn’t really on anyone’s radar. It’s now very much on everyone’s radar and worries them, said Tracy Vaught, owner of H-Town Restaurant Group, which owns four restaurants in Houston. “The whole idea of ​​having to pay taxes after all this is fair, it’s like Congress has to be deaf to not correct this.”

Vaught said his downtown location is still struggling in an area that no longer has office workers or convention attendees.

“We’ll have the money to pay for it, but I think a lot of people don’t,” he said. “It was almost an interest.”

Interestingly, the big benefit for business owners doesn’t really count as part of the cost of the bill. This is because the Joint Committee on Taxation, which creates revenue estimates for tax bills, assumed that lawmakers had wanted to allow deductions in March and are now clarifying that intention.

But the PPP’s tax costs were also not listed as part of the cost of the March bill, as the accountants assumed the deductions existed even without PPP and that the tax-free loan forgiveness did not change anything. .

This peculiarity means that allowing deductions does not cost the government anything for scoring purposes, although it does allow allowing billions of dollars in deductions that otherwise could not be adopted under the Treasury ruling. So Congress can use that provision to allocate more money to the economy and offer tax cuts to businesses without shifting other programs within the overall relief bill, where Republicans have insisted on limiting the total size.

“It provides income exclusion and a deduction,” said Richard Reinhold, who teaches tax law classes at Cornell University. “The result is a probable loss of hundreds of billions of dollars in tax revenue that was never obtained or disclosed.”

Write to Richard Rubin to [email protected]