AICPA joins in urging tax deductions for expenses paid with forgiven PPP loans

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The American Institute of CPAs joined with more than 170 business and trade organizations in asking congressional leaders to allow businesses to write off expenses paid for with Paycheck Protection Program loans that have been forgiven.

The letter, addressed Tuesday to House Speaker Nancy Pelosi, D-California, and Senate Majority Leader Mitch McConnell, R-Kentucky, urged Congress to make a technical correction to fix the tax treatment of loan forgiveness on PPP loans. Separately, on Tuesday, the U.S. Small Business Administration released a set of questions and answers on PPP loan forgiveness.

The letter from the AICPA and other business groups, including the National Retail Federation, the International Franchise Association, the American Dental Association, and Associated Builders & Contractors, asks Congress to reverse an IRS notice that denies borrowers the ability to deduct the same expenses that qualified them for loan forgiveness. However, the groups argue that goes against the intention of the CARES Act.

“When the PPP was adopted as part of the Coronavirus Aid, Relief, and Economic Security Act, Congress made clear that any loan forgiveness under the program would be excluded from the borrower’s taxable income,” they wrote. “Specifically, a recipient of a PPP loan was eligible for forgiveness of indebtedness for amounts equal to certain payroll, mortgage interest, rent, and utility payments made during a prescribed period, with any resulting cancelled indebtedness excluded from the borrower’s taxable income.”

The groups contend that the IRS notice got the intent of the legislation wrong and argue against the interpretation of Treasury Secretary Steven Mnuchin, who has rejected previous appeals on the matter.

“The publication of IRS Notice 2020-32 effectively overturned this policy by denying these borrowers the ability to deduct the same expenses that qualified them for the loan forgiveness,” said the letter. “The Notice argues ‘… Section 265(a)(1) of the Code disallows any otherwise allowable deduction … for the amount of any payment of an eligible section 1106 expense to the extent of the resulting covered loan forgiveness…’ Defenders of the IRS’ position argue that allowing businesses to deduct these expenses would result in business owners receiving a 'double' benefit. This is simply untrue. Congress intended for the loan forgiveness under PPP to be tax-free. The IRS Notice reverses that position and eliminates any benefit, let alone a double benefit. If a business has $100,000 of PPP loans forgiven and excluded from its income, but then is required to add back $100,000 of denied business expenses, the result is the same as if the loan forgiveness was fully taxable. Section 1106(i) becomes moot if the IRS Notice is allowed to stand. On the other hand, denying the correct tax treatment of these loans will result in hardship for many struggling businesses.”

The groups pointed out that more than 5 million businesses have participated in the PPP and over $520 billion has been lent to businesses through the program.

“In nearly all cases, these businesses have already spent the loan proceeds keeping employees on payroll and meeting other necessary costs,” said the letter. “In addition to the approximate $100 billion tax hike the IRS position represents, denying businesses the ability to deduct these expenses could result in numerous other complications — how would the denial of deductible wages affect the 199A deduction or the Work Opportunity Tax Credit? How do you offset expenses incurred in 2020 with loan forgiveness realized in 2021? Does disallowed interest expense avoid the excess business interest expense limitation under section 163(j)? The correctness of the IRS’s reasoning underpinning Notice 2020-32 is a debatable point and if left intact it will certainly result in extensive legal challenges. What is not debatable, however, is congressional intent regarding the tax treatment of these forgiven loan amounts.”

As part of the next round of COVID-19 relief legislation, the groups are asking Congress to clarify the matter by restoring the tax benefits as intended under the CARES Act to help distressed businesses.

“Millions of businesses across the country received much-needed relief during a time of global crisis and it’s imperative that they receive the full measure of assistance intended by Congress,” said AICPA vice president of taxation Edward Karl in a statement. “Many small businesses are still in economic distress and we urge members of Congress to take action to ensure that the necessary corrections are included in the next relief package.”

A group of senators introduced bipartisan legislation known as the Small Business Expense Protection Act of 2020 to deal with the problem.

SBA PPP loan forgiveness FAQ

Separately, the 10-page FAQ document released Tuesday by the SBA provides some much-needed information for small businesses seeking forgiveness on their PPP loans, although it is a mixed bag.

“Corporate shareholder-employees will find some good news in the FAQs, but those who were looking to attempt to pre-pay retirement or health benefits will not be happy with the guidance in the FAQs,” said Ed Zollars of Kaplan Financial Education in a blog post.

There are three notable clarifications in the FAQ, according to Aprio, a Top 100 Firm, in an email to clients Wednesday. They involve accelerated payments of health care coverage and retirement plan contributions; payments made under agreements executed prior to Feb. 15, 2020; and the definition of transportation costs that are eligible for loan forgiveness. Unfortunately, like the SBA’s previous guidance for mortgage interest, the FAQ document says forgiveness is not provided for expenses for group health benefits or retirement benefits accelerated from periods outside the covered period or the alternative payroll covered period.

For payments under lease or mortgage agreements to be eligible for loan forgiveness, they need to be related to an agreement before Feb. 15, 2020. However, the FAQ expands that guidance to clarify that if a lease existed before Feb. 15 and expires on or after that date and is renewed, the lease payments made under the renewed lease during the covered period are eligible for forgiveness. Similarly, if a mortgage loan on real or personal property that existed before Feb. 15 is refinanced on or after that date, the interest payments on the refinanced mortgage loan are eligible for forgiveness.

The FAQ also clarifies exactly what qualifies as transportation costs: “Guidance relating to transportation has been vague until now,” said Aprio. “The FAQ clarifies that eligible expenses for loan forgiveness related to a service for the distribution of transportation refers to transportation utility fees assessed by state and local governments.”

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AICPA Paycheck Protection Program CARES Act Coronavirus SBA IRS Tax deductions