PPP Loan Forgiveness Update – IRS Doubles Down on Unfavorable Taxpayer Treatment

Last May, we shared with you the release of IRS Notice 2020-32 which provided initial guidance that expenses paid from PPP proceeds allocable to a forgiven portion of the loan will not be deductible and its position being inconsistent with bipartisan publicly stated positions.  Chairman Grassley (R) of the Senate Finance Committee and his counterpart Chairman Neal (D) in the House, Ways and Means Committee stated this treatment was not within the spirit of the law.

The U.S. Treasury Department and the IRS released guidance on November 18th, clarifying what they believe is the appropriate taxpayer treatment where a PPP loan has not been forgiven by the end of the year the loan was received.  Essentially if a taxpayer reasonably believes that a PPP loan will be forgiven, whether requested by the end of the year or not, the expenses are not deductible.  Also issued was safe harbor rules to allow for deductions if subsequent to year end a taxpayer either was denied forgiveness or irrevocably decides not to seek forgiveness. See Revenue Ruling 2020-27 and Revenue Procedure 2020-51.

As in May, bipartisan backlash was quick.  The top Republican and Democrat for the Senate Finance Committee, in charge of taxation, released a joint statement stating that the Treasury has “missed the mark” with their view of limits on tax benefits to small businesses when they need it most.

“Since the CARES Act, we’ve stressed that our intent was for small businesses receiving Paycheck Protection Program loans to receive the benefit of their deductions for ordinary and necessary business expenses. We explicitly included language in the CARES Act to ensure that PPP loan recipients whose loans are forgiven are not required to treat the loan proceeds as taxable income. As we’ve stated previously, Treasury’s approach in Notice 2020-32 effectively renders that provision meaningless.

“Regrettably, Treasury has now doubled down on its position in new guidance that increases the tax burden on small businesses by accelerating their tax liability, all at a time when many businesses continue to struggle and some are again beginning to close. Small businesses need help maintaining their cash flow, not more strains on it.

“While we continue our efforts to clarify in any end-of-year legislation the intended relief in the CARES Act, we have an opportunity to provide meaningful relief to small businesses at this critical time. We encourage Treasury to reconsider its position on the deductibility of these expenses, and the timing of those deductions, to provide relief to the small businesses that need it most.” Grassley (R) and Wyden (D) ranking members release.

We are monitoring the situation closely, and look forward to providing updates. In the meantime, if you believe businesses need the relief, call or email your Senators and Representatives to express the need for the intent of the law to be applied by the Treasury and the IRS.  To discuss any questions you may have, please contact a member of your engagement team or reach out to us via our website.