- Companies won't be able to take their usual federal income tax deductions for payroll, rent, and other business expenses to the extent they took out a Paycheck Protection Program (PPP) loan from the federal government and have it forgiven, the IRS has ruled.
- The American Institute of Certified Public Accountants (AICPA) and others say the ruling conflicts with the intent of Congress and plan to challenge it.
- "In effect, the IRS guidance means that the taxability provision (of the stimulus law that created the loan program) has no meaning," Chris Hesse, chair of the AICPA Tax Executive Committee, said.
In its ruling (IRS Notice 2020-32), the IRS says it is disallowing business expense deductions to the extent companies have their loan forgiven to prevent recipients of PPP loans from receiving double tax benefits.
The forgiven loan, the IRS says, amounts to a tax benefit — tax-exempt income — so allowing businesses to deduct the expenses that were paid using the loan proceeds would amount to a second benefit for the same money.
"This treatment prevents a double tax benefit," the agency said in the notice.
Under PPP loans, companies with fewer than 500 employees are eligible for a loan up to 2.5 times their average monthly payroll costs, up to a maximum $10 million. As long as they retain the headcount they had at the start of the pandemic (or hire them back by a certain date) and use at least 75% of their loan proceeds to meet payroll costs and the rest of the proceeds for other eligible expenses, including rent and utilities, they don't have to pay the loan back.
Challenge to IRS
The Coronavirus Aid, Relief, and Economic Security (CARES) Act doesn't address the issue of deductibility, but it was specific that forgiven loan amounts were not to be counted as income.
"Canceled indebtedness under this section shall be excluded from gross income for purposes of the Internal Revenue Code of 1986," the statute says.
If the forgiven loans aren't income, AICPA and others argue, there is no rationale for the IRS to disallow deductions for the expenses businesses paid using the loan funds.
"Why waste the ink [in the law] to say that for purposes of the Code, the loan forgiveness is not includible in income?" Hesse of AICPA asked.
Critics are expected to find allies in Congress. Both Senate Finance Committee Chair Chuck Grassley (R-IA) and House Ways & Means Committee Chair Richard Neal (D-MA) say the IRS interpretation goes against their goals for the loans.
"The intent was to maximize small businesses' ability to maintain liquidity, retain their employees and recover from this health crisis as quickly as possible," Grassley said.
"We are planning to fix this in our next response legislation," a Neal spokesperson said in May.
For now, the IRS is proceeding on the basis that it won't allow for the deductions, but that could change soon.