PPS borrowers can get tax relief

Lawmakers say they only want to clarify what Congress was up to when it created the PPP and prevent unexpected tax bills from hitting business owners. Still, a full deduction could cut federal revenue by about $ 200 billion, with a majority going to very high-income households, said Adam Looney of the Brookings Institution, a former Obama official.

There is a two-pronged agreement in Congress to reverse the Treasury’s decision that denies deductions and frustrates 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 lobbying power of business groups and senior lawmakers in both parties refutes that view.

“We all hope Congress just clears this up and takes this all off the table so that our clients can relax,” said Christopher Hesse of accounting firm CliftonLarsenAllen LLP, who chairs the executive tax committee of the American Institute of Certified Public Accountants.

The issue has watered down since Congress established the PPP in late March. The program offered low-interest loans with the promise of forgiveness if companies continued to pay their employees.

The law’s authors tried to address the potential tax implications by stating that these forgiven loans – unlike typical forgiven loans – would not be counted as taxable income. But the law was silent on whether companies could still take deductions for salaries and other expenses financed by the loans.

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

Lawmakers argued that they intended to allow the deductions and that the refusal contradicted the goal of making the income tax-free in the first place. But Mr. Mnuchin wouldn’t budge. Without congressional action, some business owners would likely try to challenge the IRS in court over whether the agency’s rule complied with tax laws, Mr. Hesse said.

Under the Treasury’s decision, a company that receives a $ 100,000 loan would not count that as income but would have to forgo $ 100,000 in deductions. In many cases, the loss of those deductions is mathematically equivalent to taxing the PPP loan.

Instead, under the proposal now pushed by lawmakers, the $ 100,000 loan would not be income and the company could deduct $ 100,000 in related expenses. For an entrepreneur in the highest tax bracket, that’s a difference of $ 37,000 and the PPP loan would become more like a tax-free government benefit.

‘That is a lot of money. You could do much better things with it, ”said Frank Clemente, executive director of Americans for Tax Fairness, a progressive group against tax deductions.

But many Democratic lawmakers support the deductions.

Trade associations began a campaign to get Congress to recant Mr. Mnuchin’s decision. Business owners say the whole purpose of the PPP program was to cover these expenses, not provide cash for any use. They note that they had to incur these deductible expenses to get forgiveness on the loan.

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

Everyone was so concerned about just surviving that that wasn’t really on anyone’s radar. Now it’s high on everyone’s radar and they are concerned about it, 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 just – it’s like Congress has to be tone-deaf not to correct this.”

Ms Vaught said her downtown location is still difficult in an area where there are no office workers or conference attendees.

“We will have the money to pay them, but I don’t think a lot of people will,” she said. “It was almost a bait-and-switch.”

Oddly enough, the big benefit for business owners doesn’t really count as part of the cost of the bill. That’s because the Joint Tax Committee, which prepares income estimates for tax assessments, assumed that lawmakers had wanted to allow the deduction in March and is now clarifying that.

But the PPP’s tax expense was also not listed as part of the cost of the March bill, as the scorer assumed the deductions existed even without the PPP, and that the waiver of tax-free loans didn’t change anything.

That quirk means that allowing the deductions will cost the government nothing to score, even though it allows billions of dollars in deductions that otherwise could not be taken under the Treasury ruling. Congress can thus use this provision to pump more money into the economy and offer corporate tax cuts without moving other programs within the general relief law, where Republicans have pushed for overall size restrictions.

“Both an income exclusion and a deduction are provided,” said Richard Reinhold, a professor of tax law at Cornell University. “The result is a likely loss in tax revenue of hundreds of billions of dollars that was never scored or disclosed.”

Write to Richard Rubin at [email protected]