Posted by Dan Taddei, NARI Government Affairs Consultant
A significant portion of COVID relief enacted by Congress this year was in the form of direct payments and not directly tax-related. However, both the Family First Coronavirus Relief Act and the CARES Act include a number of tax provisions. The Paycheck Protection Program was not directly tax-related, although a tax issue has come up during the course of the year. The IRS has taken the position that expenses covered by the PPP, where those loans are forgiven, are not deductible. Many in Congress have said that this was not their intent, but Congress has not yet been able to enact a provision to clearly make those expenses deductible.
It was the clear intent of Congress to make the full value of the PPP loans available to business owners to pay allowable expenses, not to have business owners return significant amounts of the loan value in the form of increased taxes. Additionally, businesses that did not use all of the funds in 2020 for allowable expenses are already required to repay that portion of the loan that is not forgiven. While some businesses were more heavily affected than others during 2020, the increased taxes will need to be paid by reducing equity in the company as it moves into 2021. For many businesses – including construction – a backlog of work supported 2020 payroll. The impacts of the economic slowdown resulting from the pandemic are most likely to be felt in 2021 and the continued availability of cash reserves – whether PPP loans or owner equity – is critical.
- When the Paycheck Protection Program (PPP) was established by the Coronavirus Aid, Relief, and Economic Security Act in March, the law stated that any loan forgiveness provided to qualifying employers under the program would be excluded from the borrower’s taxable income.
- However, at the direction of the Treasury Department, the IRS issued Notices 2020-27 and 2020-32 specifying expenses paid with PPP loans that are forgiven will not be tax-deductible.
Absent new legislation to clarify this policy, employers who received a PPP loan that is forgiven could see an unexpected tax bill in the new year.
Example: A $100,000 PPP loan used for payroll expenses in 2020 that are not deductible (per the IRS Notice) could result in an increased tax bill to company owners of $25,000 or more!
Contact your legislators and ask them to support passage of legislation to ensure employers are provided with tax deductibility of expenses paid for with forgiven PPP loans as intended by Congress. Click here to take action