As NRCA members face the continued challenges of the COVID-19 pandemic, many must make decisions regarding loans received through the Paycheck Protection Program established by Congress under the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. Paycheck Protection Program loans, which can be forgiven if used as specified by the CARES Act and subsequent regulations issued by the Trump administration, were intended to help small businesses keep workers fully employed as they navigate the economic uncertainty of the pandemic.
There is significant uncertainty regarding the tax treatment of Paycheck Protection Program loans. Absent additional legislation passed by Congress, business expenses paid with the proceeds from loans that are forgiven are not tax-deductible. NRCA supports legislation to clarify this situation and restore tax deductibility for forgiven Paycheck Protection Program expenses as was originally intended under the CARES Act.
Under the CARES Act enacted in March, qualifying small businesses could obtain loans that may be forgiven by the federal government if used to cover qualified expenses of payroll, mortgage interest or rent, utility or other qualified costs during a covered period. The law also provided that any portion of a Paycheck Protection Program loan that is forgiven is to be excluded from the borrower’s taxable income.
Employers were encouraged to apply quickly for Paycheck Protection Program loans when the program opened April 3 because of uncertainty regarding how long the funding would last and how the pandemic would adversely affect the economy. Many employers that obtained Paycheck Protection Program loans did so with the intention of having the loans forgiven and not be considered taxable income.
IRS Notice 2020-32
On April 30, 2020, the IRS issued IRS Notice 2020-32 effectively reversing the tax treatment of Paycheck Protection Program loans that are forgiven. The notice states expenses paid for with Paycheck Protection Program loans that are ultimately forgiven will not be tax-deductible. Under this ruling, many small businesses are set to see a significant and unexpected tax bill in 2021.
IRS Notice 2020-32 denies Paycheck Protection Program borrowers the ability to deduct the expenses that qualified them for loan forgiveness. The notice reads: “[S]ection 265(a)(1) of the (Internal Revenue) Code disallows any otherwise allowable deduction ... for the amount of any payment of an eligible section 1106 expense to the extent of the resulting covered loan forgiveness ... .”
The Department of the Treasury and IRS argue allowing employers to deduct these expenses results in a “double-dip” benefit because the income of the loan is tax-free. This view fails to understand the ruling effectively nullifies the tax-free benefit for small businesses. For example, if a business has a $100,000 Payback Protection Program loan excluded from its income but then is denied a deduction for $100,000 of business expenses paid with loan funds that are forgiven, the effect on an employer’s bottom line is the same as if the loan forgiveness were fully taxable.
Unfortunately, despite lawmakers’ intent to allow Paycheck Protection Program loans that are forgiven to be tax-free, the language in the CARES Act is problematic and could prevent a successful legal challenge. The Department of the Treasury likely will argue a tax deduction should not be allowed because the CARES Act states loan forgiveness “shall be excluded from gross income” and because this type of income is the type of tax-exempt income referenced in Section 265 of the Internal Revenue Code. It would have been clearer for Congress to clarify its intent by using “gross basis” instead of “gross income” when referring to the tax treatment of forgiven Paycheck Protection Program loans.
Because of the emergency manner in which the CARES Act was drafted and passed, an area of arcane tax law was not sufficiently addressed. Alongside NRCA’s advocacy, many members of Congress continue to reiterate their intent for Payback Protection Program loan forgiveness to be tax-free though some Republicans have sided with the Trump administration in favor of the IRS ruling. Failure to clarify the disputed section of the CARES Act likely will result in hardship for many stressed businesses still struggling to navigate the COVID-19 pandemic. In many cases, employers already have used the loan proceeds to keep employees on their payrolls and meet other qualifying needs based on the law as understood at the time it was enacted. Many of the small businesses the program was designed to help will face a surprise tax hike absent clarifying action by Congress.
The results of a Main Street America® survey of employers conducted in August confirms they identify restoring tax deductibility of Paycheck Protection Program loan forgiveness as a top priority. In August, NRCA joined 179 trade groups in a letter calling on Congress to restore the tax deductibility of loan forgiveness as soon as possible.
In addition, NRCA is advocating for bipartisan support of the Small Business Expense Protection Act (S. 3612, H.R. 6821). Introduced in the Senate by Sen. John Cornyn (R-Texas) and in the House by Rep. George Holding (R-N.C.), the legislation is intended to restore deductibility of forgiven Paycheck Protection Program loan expenses. At press time, NRCA is actively meeting with congressional leadership and members of the House Ways and Means Committee and the Senate Finance Committee to have this important issue addressed by the end of 2020. NRCA members are encouraged to contact their lawmakers in support of the Small Business Expense Protection Act via an NRCA Action alert available at roofingadvocacy.nrca.net/actionalerts.
Fighting for you
As COVID-19 cases rise in the U.S., the economy remains uncertain. Despite broad support from Congress and the business community for restoring the tax deductibility of Paycheck Protection Program loan forgiveness, the problem remains unsolved. A $100 billion tax on 5 million small businesses during a pandemic undoubtedly would have a negative effect. NRCA will continue working with policymakers in Washington, D.C., to address this vital issue and help ensure Paycheck Protection Program loan forgiveness will be deductible as intended by law.
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