If Congress fails to act before the end of year, struggling small businesses will be taxed on their Paycheck Protection Programs (PPP) loans. Given that businesses across the country are enduring government-mandated lockdowns, this tax could mean the difference between surviving and shutting down.
Lawmakers are negotiating an end-of-year government funding package and another Coronavirus relief bill. As part of this proposal, they must include legislation allowing business to deduct PPP loans when spent on ordinary, necessary business expenses, as is typically allowed.
Failing to act will impose taxes on as many as five million small businesses across the country that have relied on PPP loans to keep the lights on since the program was created. According to recent data from the Small Business Association, the average loan received by businesses was just $100,000 and more than two thirds of companies received a loan of $50,000 or less. PPP loans are calculated based on the average monthly cost of salaries that a business incurs, so the average loan is correlated to the number of workers a business has on their payroll.
The PPP was enacted through the bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide small businesses impacted by COVID-19 with emergency liquidity so they could continue making payroll and meeting other business expenses. While conservatives typically oppose new government spending programs, the PPP was necessary because of the unprecedented situation where governments forcefully closed businesses due to the pandemic.
While this aid provided a much-needed lifeline for small businesses, the IRS and Treasury Secretary Steven Mnuchin ruled that businesses would be taxed on these PPP loans. This announcement was made on April 30 when 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.
By imposing taxes on PPP loans, the IRS essentially canceled a significant portion of the loan, eroding the financial assistance granted. This will harm small businesses across the country as they attempt to survive and re-engage in commerce in the wake of the pandemic.
This tax is even more harmful given Congress is proposing $300 billion in additional PPP funding in the next COVID-19 relief package. This additional funding was included because governments are still restricting the ability of small businesses to fully open and conduct business.
Taxing previously granted PPP loans undermines the benefit of any new loans – essentially, the government will be giving with one hand and taking away with the other. Small businesses would also face a compliance nightmare – they will have to track loans received (including documenting what they were spent on), pay taxes on them, and then apply for new loans.
If Congress fails to stop this tax increase on small business PPP loans, hundreds of thousands of American businesses will face a tax hike. The number of businesses that will face a tax hike in key states is broken down below:
- Number of businesses receiving PPP: 623,360
- Number of businesses receiving PPP: 174,429
- Number of businesses receiving PPP: 50,655
- Number of businesses receiving PPP loan: 118,392
- Number of businesses receiving PPP loan: 129,289
- Number of businesses receiving PPP loan: 348,870
- Number of businesses receiving PPP loan: 149,144
- Number of businesses receiving PPP loan: 173,552
- Number of businesses receiving PPP loan: 417,276
This tax hike will also impact hundreds of thousands of businesses in key industries:
- Number of businesses receiving PPP loan: 532,775
- Number of businesses receiving PPP loan: 496,551
- Number of businesses receiving PPP loan: 238,494
Accommodation and Food Services
- Number of businesses receiving PPP loan: 383,561