If Congress fails to act before the end of the year, millions of struggling small businesses will be stuck with a tax bill of thousands, or even hundreds of thousands of dollars because they are forced to pay taxes on federal COVID-19 loans.
Lawmakers can protect small businesses by passing S. 3612, the “Small Business Expense Protection Act,” introduced by Senator John Cornyn (R-Texas), Senate Finance Committee Chairman Chuck Grassley (R-Iowa), Finance Ranking Member Ron Wyden (D-Ore.), Senator Tom Carper (D-Del.), and Senate Small Business Committee Chairman Marco Rubio (R-Fla.). Congress should ensure this bill is included in an end-of-year legislative package.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act created the PPP to provide small businesses impacted by COVID-19 with emergency liquidity so they could continue making payroll and meeting other business expenses.
However, on April 30, the IRS released Notice 2020-32, which prohibited businesses from deducting expenses paid with a PPP loan such as payroll, rent, and utility expenses, even though these expenses would otherwise qualify as ordinary, tax deductible business expenses.
Essentially, the IRS cancelled a significant portion of the PPP loan given to small businesses by imposing taxes on the loans. This will erode a portion of the financial assistance granted through the program and will harm small businesses across the country as they attempt to survive and re-engage in commerce in the wake of the pandemic.
The IRS Notice clearly disregards Congressional intent, as Section 1106(i) of the CARES Act clearly states that any PPP loan should be exempt from taxation if such loan is forgiven. Further, Congressional leaders from both sides of the aisle recently urged Treasury to reverse course, noting that the IRS Notice “ignores the overarching intent of the PPP, as well as the specific intent of Congress to allow deductions in the case of PPP loan recipients.”
Small businesses across the country are still struggling to keep the lights on due to the Coronavirus pandemic. The last thing these businesses need is an unexpected tax bill on the expenses paid with PPP loans. Lawmakers must step in and protect businesses by passing the Small Business Expense Protection Act.