Though Congress included funds through expanded Small Business Administration (SBA) loans to businesses, in a recent letter to the Senate, SMACNA expressed its deep concern that the definitions put forth by regulatory agencies interpreting this critical legislation do not expressly include the legislation’s original intent of flexible Paycheck Protection Program (PPP) terms for borrowers and lenders.
The Internal Revenue Service (IRS) issued Notice 2020-32 which “clarified that no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).” This is at odds with the legislative text of the CARES Act, specifically Section 1106(i), which says that, regarding the “taxability” of the loan forgiveness available to PPP recipients, any amounts forgiven by a PPP loan “shall be excluded from gross income”
The impact of this IRS ruling is significant and has had a punishing impact on PPP borrowers to substantially increase the tax liability of PPP loan recipients at the worst possible time. For C-Corporations, it means an increase in the net after tax liability of PPP loan forgiveness by as much as 21%. For pass- through businesses, such as S Corporations, the marginal increase could be as high as 37%. Once state income taxes are included, the impact will be even greater.
Congress was clear in passing the PPP, its intention was not to give assistance with one hand and take away ordinary business deductions with the other. S. 3612, The Small Business Expense Protection Act, bipartisan legislation introduced by Senators Cornyn (R-TX), Wyden (D-OR), Grassley (R-IA), and twenty other bipartisan cosponsors, would clarify the Small Business Administration’s Paycheck Protection Program IRS guidance so small businesses can deduct expenses paid with a forgiven PPP loan from their taxes.