Members of Congress push to reverse IRS ruling on Paycheck Protection Program tax liability

A bipartisan coalition of 179 members of the House of Representatives is asking House leadership to include “a fix” in the coronavirus assistance package currently being negotiated to allow Paycheck Protection Program loan recipients to take normal business expense deductions paid with the loan proceeds.

In the Dec. 9 letter, House members said IRS rulings disallowing the deductions for expenses that the PPP program was established to support goes against the intention of Congress in enacting the program.

The IRS released a notice on April 30 disallowing the deduction of forgiven expenses. Last month, the IRS issued a revenue ruling stating that those expenses cannot be deducted if the loan is forgivable, whether or not the recipient has applied for forgiveness.

The notice and ruling was met with strong objections from small business organizations across the United States. It took many local business owners by surprise. A representative of the Suffolk Taverns and Restaurants Association, who estimated the pandemic had already forced as many as 40% of Suffolk’s restaurants and bars to permanently closed their doors, predicted the tax liability would be “the final nail in the coffin for most people.”

More coverage: ‘It’s going to kill us:’ Small business owners face surprise tax bite in PPP loan program” (Dec. 9)

Congress established the PPP “in response to these dire economic conditions” and provided more that $600 billion for forgivable loans to small businesses to help keep employees on payroll and continue operating, the representatives said in the letter.

More than five million PPP loans have been made to businesses in all 50 states, according to the letter.

“This program has helped keep our economy from total collapse by providing a lifeline to small businesses with no alternative funding source,” the representatives said.

“The PPP was intended to provide vital tax-free assistance for certain business costs in unprecedented economic circumstances. Congress specifically included Section 1106(i) in the CARES Act to exclude forgivable loan assistance from taxable income,” the members of Congress said.

The position taken by the IRS is contrary to congressional intent, the representatives said. It “essentially ignores this section and effectively makes forgivable loans taxable despite Congress’s clear intent to allow the deduction of necessary business expenses.”

At a time when many small businesses are struggling to keep their doors open each day, “we cannot saddle small businesses with a massive surprise tax bill,” the representatives said.

Rep. Lee Zeldin was one of the members who signed the letter.

“Our nation’s small businesses have been hit hard in the last year. If the government is going to shut down a thriving business through no fault of that business, then the government has the responsibility to ensure that business makes it out the other side,” Zeldin said yesterday.

“The Paycheck Protection Program has helped provide relief to so many of these small businesses, and we must ensure that the small business owners who desperately need this funding to survive do not go under thanks to a surprise tax bill caused by the very relief that’s supposed to keep them afloat,” Zeldin said.