Many businesses rightly regarded the initial Paycheck Protection Program (PPP) as exactly the type of government-backed economic lifeline that could help them weather the early stages of the COVID-19 crisis. But as these pandemic-ravaged companies await word of another desperately needed stimulus package, they’re discovering that even the PPP may not have been all it was cracked up to be.
Even though PPP loans are forgivable if at least 60% of the proceeds are applied toward payroll costs, the IRS noted back in April that although the forgiveness is tax-free, business owners can’t deduct expenses that were covered by the loan. Now the agency’s latest guidance, issued last week, says that even if a loan has yet to be forgiven, if a business “reasonably believes” the loan will be forgiven in the future the costs related to that loan are not deductible.
In other words, PPP borrowers’ income may end up seeming higher on paper if they can’t deduct expenses, thus inflating their 2020 taxes at a time when ready cash will likely still be hard to come by.
The initial IRS decision – along with its latest reiteration – has drawn bipartisan criticism from members of the Senate Finance Committee, which may take action to override the agency’s position. The AICPA is one of many associations and organizations that have asked Congress to address the issue with legislation before small businesses end up with yet another economic gut punch from 2020.
“PPP recipients – particularly small businesses – cannot afford to be surprised with a tax bill next year on their PPP loan expenses and more than ever before need to be able to project how much cash they will have to cover their basic expenses,” says AICPA vice president of taxation Edward Karl. “Members of Congress must act now and pass this legislation to ensure that struggling businesses and their owners can recover.”