Business groups urge Congress to allow tax deductions for expenses paid with PPP loans

A group of more than 170 trade associations is urging Congress to allow businesses to get tax deductions for expenses associated with loan forgiveness under the Paycheck Protection Program (PPP).

“As part of the next round of COVID19 relief, we request that Congress reaffirm its intent and restore the tax benefits it intended to give distressed Main Street businesses as part of the CARES Act,” the groups wrote in a letter this week to House Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Mitch McConnell (R-Ky.).

Groups that signed the letter include the American Farm Bureau Federation, American Institute of CPAs, the National Retail Federation and the National Association of Home Builders.

Under the PPP, created by legislation President Trump signed in late March called the CARES Act, small businesses can get loans that are forgivable if the proceeds are used for payroll, rent, mortgage interest and utilities. The CARES Act specified that forgiveness of PPP loans is not taxable income.

The IRS in April issued guidance stating that expenses are not deductible if payment of the expenses results in a PPP loan being forgiven. The guidance has been criticized by some key lawmakers on both sides of the aisle, who argue it goes against congressional intent. But Treasury Secretary Steven Mnuchin has defended the guidance, saying that businesses can’t “double dip.”

The industry groups pushed back on the argument made by supporters of the IRS guidance.

“Congress intended for the loan forgiveness under PPP to be tax-free. The IRS Notice reverses that position and eliminates any benefit, let alone a double benefit,” the groups wrote.

The groups also said that denying tax deductions for expenses paid with PPP loans would be burdensome for businesses that have experienced financial hardship during the pandemic. They said the IRS’s position represents a tax increase of about $100 billion.

“Denying the correct tax treatment of these loans will result in hardship for many struggling businesses,” the groups wrote.

Democrats and Republicans are currently negotiating over another coronavirus relief package. House Democrats passed a bill in May that would clarify that expenses paid with PPP loan proceeds don’t result in the denial of a tax deduction. A proposed relief package that Senate Republicans released last week did not include a provision on this topic, but some prominent senators are supportive of allowing the deductions.

The Joint Committee on Taxation considers the provision in the House bill to be consistent with the congressional intent of the CARES Act, so it estimates that the provision does not have a revenue impact.