IRS Needs Strong Pushback on PPP Loans Ruling

By Mike Flynn, Mike Flynn & Associates


Many would argue that the Internal Revenue Service will screw the taxpayer whenever it means the tax agency can take in more money for its actions. But in the midst of the coronavirus and the CARES act tax treatment of loans designed by Congress to help businesses survive?


Seems so, according to information my Seattle accountant, Mark Long, distributed to his clients this week, following up on information sent out a few days ago by Bloomberg News Service and other business-information sites.


His email memo said that last week, the IRS issued an order "which substantially changes the tax treatment of the Payroll Protection Program (PPP) loan program."


Long, of The Myers Associates, noted "the CARES Act explicitly states that the forgiveness of the loan is NOT taxable income."


"The IRS has concluded that while the forgiveness is not taxable income, the qualifying expenses (payroll, employee benefits, rent, etc.) will be non-deductible," Long said.  "The IRS Notice, therefore, does effectively make the forgiveness taxable income."


So the goal of discussing the issue here is that members of both the House and the Senate need to be pressed to push the IRS away from the table, in essence by nullifying the agency's decision, ideally in a high-visibility push back. The more public scrutiny and outcry on this the better.


And this state's Senators and members of Congress should be pressed to be in the forefront, and not with deliberative pace, but quickly.


PPP was established under the CARES Act. Operated by the Small Business Administration (SBA), it provides cash for two months of payroll costs. The measure, enacted by Congress in March, allows recipients to use the proceeds for payroll costs, employee healthcare benefits, interest on mortgage obligations, rent, utilities, and interest on any other debt. The loans do not have to be repaid if employers keep workers on the job or rehire laid-off workers.  


While the measure said the loan is not subject to taxes, it failed to let companies know whether they could still write off the expenses they covered with that money. In any other circumstance, IRS regulations allow companies to write off business expenses, such as wages, rent, and transportation expenses. The clarification adds the latest wrinkle, the news service noted.


It's a big difference," Long told me in an email. "And the biggest problem is that you have to make business decisions with minimal info.  If you want people to spend the entire PPP loan, then that's different than them spending part and holding part back to cover taxes."


The IRS Notice "is substantially different than all of the initial information released about the PPP program, and from what we have read, it is also contrary to the intent of the CARES Act legislation," Long added.  


At this time, it is unclear whether the IRS position will remain as stated in the Notice or if the Notice will be reversed.  It is also possible that a legislative fix is introduced.  However, it's quite possible this may not occur until after your 8-week loan forgiveness period is over."


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