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Small business owners who borrowed operating cash through the Paycheck Protection Program this year may be facing substantial unexpected tax bills as a result.

“This is going to shut the doors on every restaurant that took the loan,” said one Riverhead restaurateur, who spoke on the condition of anonymity.

“It was supposed to be a tax-free loan that was forgiven. If I’m going to turn around and get a tax bill…” he said. “I’ve already lost everything I owned and everything I ever made,” he said. “This is just devastating.”

The PPP loans were intended to help businesses weather the economic storm caused by the coronavirus pandemic by providing money for payroll, rent and utilities. Under the coronavirus relief act that created the PPP, the funds were tax-exempt and the loans would be forgivable if used as intended under the law.

But the IRS, in a revenue ruling last month, said authorized business expenses paid with PPP loan proceeds are not deductible as business expenses. In other words, while PPP loan proceeds are not taxable, business expenses paid with the loan proceeds can’t be deducted from gross income. The bottom line is higher taxable income.

The ruling comes at a time when businesses are facing new restrictions and possible shutdowns in response to the recent virus surge.

“This will put the final nail in the coffin for most people,” said Robert Gerety, vice president of the Suffolk Taverns and Restaurants Association. “It’s going to kill us all and it’s going to kill us for good.”

Gerety said an estimated 30% to 40% of Suffolk’s bars and restaurants have already permanently closed. He had not been aware of the IRS ruling when contacted by RiverheadLOCAL and he was stunned.

“They never told us this in the beginning,” Gerety said.

Riverhead Chamber of Commerce president Robert Kern was also taken aback by word of the ruling.

If the only authorized business expenses under the PPP can’t be deduced from gross income, Kern said, “that’s like throwing an anchor to a drowning man.”

Kern said chambers of commerce “will do everything possible to stop this kind of stupidity. It’s dangerous.”

On Dec. 3, the U.S. Chamber of Commerce and hundreds of trade groups across the country sent a letter to leadership of the U.S. House of Representatives and U.S. Senate demanding Congress enact legislation before the end of the year to address “the tax treatment of loan forgiveness under the Paycheck Protection Program.”

Without Congressional action, the business leaders wrote, millions of small businesses will face a surprising and, in many cases, insurmountable tax bill next year.

The effect of last month’s IRS ruling is “to transform tax-free loan forgiveness into taxable income, raising the specter of a surprise tax increase of up to 37 percent on small businesses when they file their taxes for 2020.”

Bipartisan leadership of the House Ways and Means Committee and the Senate Finance Committee have issued public statements saying that the IRS ruling is contrary to Congressional intent for the PPP, which was part of the CARES Act.

“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,” Senate Finance Committee Chairman Chuck Grassley (R-Iowa) and Ranking Member Ron Wyden (D-Ore.) said in a joint statement last month.

“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,” the senators said. The Treasury Department’s approach, “effectively renders that provision meaningless.”

The ruling comes 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,” Grassley and Wyden said.

Local businesses that didn’t bounce back after the first coronavirus surge this spring can’t handle a 30% tax liability, said accountant Ron Farnworth, of Kandell, Farnworth and Pubins CPAs in Aquebogue.

“Businesses that are still struggling don’t have the cash to pay the tax liability and they’ll face interest and penalties on those assessments,” Farnworth said.

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Denise Civiletti
Denise is a veteran local reporter, editor, attorney and former Riverhead Town councilwoman. Her work has been recognized with numerous awards, including investigative reporting and writer of the year awards from the N.Y. Press Association. She is a founder, owner and co-publisher of this website.Email Denise.