May 05,2020
Grassley, Wyden, Neal Push Treasury to Allow Small Businesses To Deduct PPP Expenses
Washington – Senate Finance Committee Chairman Chuck Grassley (R-Iowa),
Ranking Member Ron Wyden (D-Ore.) and House Ways & Means Committee Chairman
Richard E. Neal (D-Mass.) today wrote to Treasury Secretary Steven Mnuchin
urging the department to change its flawed interpretation of the CARES Act preventing
businesses from deducting expenses associated with Paycheck Protection Program
(PPP) loans that are ultimately forgiven.
“Providing
assistance to small businesses, only to disallow their business deductions as
provided in Notice 2020-32, reverses the benefit that Congress specifically
granted by exempting PPP loan forgiveness from income. This interpretation means that whatever
income a small business is able to produce will be taxed on a gross basis to
the extent of the loan forgiveness, leaving substantially less after-tax
capital for the swift economic recovery we hope is on the horizon,” the lawmakers wrote.
Grassley,
Wyden and Neal specifically argue that the determination adopted by IRS and Treasury
runs contrary to congressional intent underlying the PPP program and the CARES
Act overall.
Full
text of the letter from Grassley, Wyden and Neal follows or can be found HERE.
May 5, 2020
The
Honorable Steven T. Mnuchin
Secretary
of the Treasury
U.S.
Department of the Treasury
1500
Pennsylvania Avenue, NW
Washington,
DC 20220
Secretary
Mnuchin,
We continue to appreciate the guidance that the
Treasury Department (Treasury) and the Internal Revenue Service (IRS) have
issued to facilitate the implementation of the Coronavirus Aid, Relief, and
Economic Security (CARES) Act.
Nevertheless, we are writing to express our concern with the position
taken by Treasury and the IRS in Notice 2020-32, which is contrary to
congressional intent.[1] Notice 2020-32 provides that otherwise
deductible business expenses are not deductible if the taxpayer is the
recipient of a Paycheck Protection Program (PPP) loan that is subsequently
forgiven.[2] We believe the position taken in the Notice
ignores the overarching intent of the PPP, as well as the specific intent of
Congress to allow deductions in the case of PPP loan recipients.
The PPP was designed to provide critical relief
to America’s small businesses that are experiencing unprecedented economic
disruption. The PPP was intended to
provide a lifeline to allow these businesses to pay rent and keep employees on
payroll, and to enable them to resume regular operations when it is safe to do
so. Section 1106(i) of the CARES Act
provides that a PPP loan recipient will not recognize taxable income if the
loan is forgiven, in effect making the loan a tax-free grant. Additionally, as was expressed to Treasury
during the development of the PPP, we did not intend to deny the deductibility
of ordinary and necessary business expenses, nor did these small businesses
expect to lose deductions for their business expenses when they applied for a
PPP loan.
Providing assistance to small businesses, only to
disallow their business deductions as provided in Notice 2020-32, reverses the
benefit that Congress specifically granted by exempting PPP loan forgiveness
from income. This interpretation means
that whatever income a small business is able to produce will be taxed on a
gross basis to the extent of the loan forgiveness, leaving substantially less
after-tax capital for the swift economic recovery we hope is on the horizon.
Section 1106(i) was specifically included in the
CARES Act to exclude from income loan forgiveness, which would otherwise be
taxable, to provide a tax benefit to small businesses that received the PPP
loan. Had we intended to provide neutral
tax treatment for loan forgiveness, Section 1106(i) would not have been
necessary. In that case, loan
forgiveness generally would have been added to the borrower’s taxable income,
and the expenses covered by the PPP loan would be deductible, reducing taxable
income by an offsetting amount and resulting in no additional net income.
Notice 2020-32 effectively renders Section 1106(i) meaningless. That, clearly, is contrary to the intent of
Section 1106(i) and the CARES Act more generally.
In addition to disregarding congressional intent,
we believe Notice 2020-32 is flawed in its analysis of the applicability of
Section 265(a) of the Internal Revenue Code.
Section 265(a)(1) applies to deny a deduction only if the deduction is
allocable to a class of income that is “wholly exempt from the taxes imposed by
this subtitle [of the Internal Revenue Code].”
In this case, the deduction is not allocable to the exempt income
resulting from the forgiven loan. The
deductions for expenses that make a borrower eligible for loan forgiveness are
attributable to the conduct of its business.
Accordingly, they are properly allocable to the income produced by the
business, not to the PPP loan forgiveness.
Moreover, the loan forgiveness is not a class of income that is “wholly
exempt from the taxes imposed by this subtitle.” The loan may or may not be forgiven, and the
amount of the forgiveness is limited by a number of factors. Therefore, even putting aside clear congressional
intent, we believe Section 265(a) should not be read to deny ordinary and
necessary business deductions in this case.[3]
We urge you to reconsider this determination in
light of congressional intent and the importance of maximizing liquidity for
businesses receiving PPP loans to survive and recover from the ongoing health crisis.
We look forward to your prompt response and
appreciate your attention to this important matter.
Sincerely,
-30-
Next Article Previous Article
