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The IRS issued a notice that the forgiven PPP loan amounts are not deductible as it would result in a so-called 'double tax benefit.'

Farm Press Staff

December 17, 2020

3 Min Read
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Hundreds of farm and business groups from the West and around the country are urging Congress to enact legislation before the end of the year that includes a technical correction addressing the tax treatment of loan forgiveness under the Paycheck Protection Program (PPP).

As Western Growers explains, President Donald Trump in March signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law, which included the PPP. Congressional intent of the CARES Act was to allow for continued payroll deductibility, even for the amount forgiven under the PPP loan program.

However, the IRS later issued a notice that the forgiven PPP loan amounts are not deductible as it would result in a so-called “double tax benefit.”

Western Growers and other organizations sent a letter pushing Congress to fix the issue through legislation.

"At the onset of the COVID-19 pandemic, Congress responded with speed, cooperation, and an eye to preventing the worst potential economic outcomes," the groups wrote. "We ask that you bring that same spirit of urgency and cooperation before the end of this session to prevent an avoidable catastrophe for millions of small businesses that, without Congressional action, will face a surprising, and, in many cases, insurmountable tax bill next year."

National farm groups signing on to the letter included the American Farm Bureau Federation, American Olive Oil Producers Association, American Soybean Association, Farm Credit Council, International Dairy Foods Association, National Association of Wheat Growers, National Cattlemen's Beef Association, National Cotton Council, the U.S. Apple Association, and USA Farmers.

In the West, signers included the Arizona Nursery Association, California Fresh Fruit Association, Pacific Egg & Poultry Association, Idaho Potato Commission, Oregon Association of Nurseries, the Washington Winegrowers Association and Wyoming Stock Growers Association.

Terms were simple

The groups contend the terms of the PPP were simple: if qualifying small businesses used a federally-guaranteed loan to pay their employees and cover certain non-payroll expenses, the loan would be forgiven.

From April 3, when the program launched, through Aug. 8, when its authorization expired, the Small Business Administration (SBA) guaranteed $525 billion in PPP loans to 5.2 million qualifying small businesses nationwide, preserving tens of millions of paychecks for their employees as the pandemic spread throughout the country, the organizations noted.

"Included in the CARES Act was a provision stating that any portion of a PPP loan that qualified for loan forgiveness 'shall be excluded from gross income' for tax purposes," the groups wrote. "This tax-free treatment of any forgiven loan amount was a key provision in the law and featured prominently in the debate leading up to and following the legislation’s enactment."

Despite Congress’ intent, the IRS issued Notice 2020-32, which specified that “no deduction is allowed under the Internal Revenue Code…if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the [CARES Act].”

The groups say the effect of this 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.

Additionally, the IRS recently issued Revenue Ruling 2020-27, stating that expenses funded through a PPP loan are not deductible for 2020 if “the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year," the groups noted.

Since the IRS issued Notice 2020-32, Congress has signaled that it intends to reverse the ruling.

"The most recent IRS Revenue Ruling creates a renewed sense of urgency for Congress to address this pivotal issue before the end of the year," the groups wrote. "Allowing the IRS position to remain unchallenged will result in a significant tax increase on small business owners already suffering from the effects of COVID-19 shutdowns.

"This tax will hit small business owners after their PPP loan has already been spent, and just as many states are re-imposing mandatory closures of thousands of businesses in the face of spiking numbers of COVID-19 cases."

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