PPP borrowers will get tax deductions

Lawmakers say they just want to clarify what Congress intends to do when it created the PPP and prevent unexpected tax bills from hitting business owners. However, a full deduction could reduce federal revenues by about $ 200 billion, most of it for very high-income households, according to Adam Looney of the Brookings Institution, a former Obama administration official.

There is a bipartisan agreement in Congress to overturn the Treasury’s decision that denied deductions and frustrated business owners. Some progressive groups and Treasury Secretary Steven Mnuchin have argued that the combination of tax-free income and deductible expenses has doubled, but the lobbying influence of business groups and high-ranking parliamentarians on both sides contradicts this view.

“We all hope Congress clears this and takes it all off the table so our clients can relax,” said Christopher Hesse of accounting firm CliftonLarsenAllen LLP, who is chairman of the fiscal executive committee at the American Institute of Public Accountants. authorized.

The issue has caught fire since Congress created the PPP in late March. The program offered low-interest loans, with the promise of forgiveness, if the companies continued to pay their workers.

The authors of the law tried to address the potential tax consequences by stating that these forgiven loans – unlike typical forgiven loans – will not be considered taxable income. But the law has been silenced if companies can still take deductions for salaries and other loans-financed expenses.

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

Parliamentarians have argued that they intend to allow deductions and that the refusal contradicts the purpose of making income tax in the first place. But Mr. Mnuchin would not have wavered. Without congressional action, some business owners would likely try to challenge the IRS in court as to whether the agency’s rule complies with the tax code, Hesse said.

According to the Treasury’s decision, a business that received a $ 100,000 loan would not consider this as income, but would have to waive $ 100,000 in deductions. In many cases, the loss of these deductions is mathematically equivalent to PPP loan taxation.

Instead, according to the proposal promoted by parliamentarians now, the $ 100,000 loan would not have come and the business could deduct $ 100,000 from the related expenses. For a business owner in the top tax category, this is a difference of $ 37,000 and would make the PPP loan more like a tax-free government benefit.

“It’s huge money. You could do much better things with him, ”said Frank Clemente, executive director of Americans for Taxation, a progressive group that opposes deductibility.

But many Democratic lawmakers support the deductions.

Trade associations have campaigned for Congress to overturn Mr Mnuchin’s decision. Business owners say the whole goal of the PPP program was to cover these expenses, not to provide cash for any use. They note that they had to bear these deductible expenses in order to obtain a loan forgiveness.

“The government gave us these PPP loans to pay our team. That’s what I did, “said Janice Jucker, co-owner of Three Brothers Bakery in Houston. She said she faces a $ 100,000 tax bill that would absorb the money she would rather use to open a new location.

“Everyone was so preoccupied with survival that it wasn’t really on anyone’s radar. Now it’s everyone’s radar and they’re worried about it, said Tracy Vaught, owner of the H-Town restaurant group, which owns four restaurants in Houston. “The whole idea of ​​paying taxes after all this is just – it’s like Congress should be deaf to not correct this.”

Ms. Vaught said her downtown location is still struggling in an area that no longer has office workers or convention attendees.

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

Strangely, the big benefit for business owners is not actually considered part of the cost of the bill. This is because the Joint Taxation Committee, which creates revenue estimates for tax bills, assumed that MPs intended to allow deductions in March and is only clarifying this intention now.

But the PPP’s tax costs were not listed as part of the cost of the March bill either, as those who scored assumed that the deductions existed even without the PPP and that forgiving the tax-free loan did not change anything.

That oddity means that allowing deductions costs the government nothing for scoring purposes, even if it allows for billions of dollars in deductions that might not otherwise be made under the Treasury’s decision. So Congress can use this provision to pump more money into the economy and provide tax cuts to businesses, without replacing other programs in the general aid bill, where Republicans have insisted on total size limits.

“Both an income exclusion and a deduction are provided,” said Richard Reinhold, who teaches tax law at Cornell University. “The result is a probable loss of hundreds of billions of dollars in tax revenue that has never been marked or disclosed.”

Write to Richard Rubin at [email protected]