Make PPP Expenses Tax Deductible
For purposes of the Internal Revenue Code of 1986, any amount which (but for this subsection) would be incredible in the gross income of the eligible recipient because of forgiveness described in subsection (b) shall be excluded from gross income.
I can only guess that was what lawmakers thought this meant when they said the PPP loan forgiveness was tax-free. I know I thought it was.
But then in late April, the IRS issued Notice 2020-32 that prevents PPP loan recipients to deduct any expenses that were paid using forgivable PPP monies. What does this mean to you?
Let us look at an example.
Take Happy Company. Happy Company received a $78,000 PPP loan and spends all the money on payroll, and the lender forgives the $78,000.
On Happy’s 2020 tax return, they would report $0 PPP income (remember, it is tax-free per IRC of 1986), but it may not deduct $78,000 of payroll expenses. Happy’s inability to write-off the payroll now results in the taxable income of $78,000 that Happy, an S Corporation, passes to its sole shareholder, Joe.
Let’s say Joe is in a 22% tax bracket. Joe pays $17,160 in taxes on his income. For giggles, let us say Happy passes, Joe, $78,000 in tax-exempt income, Joe is ahead by $60,840 ($78,000-17,160).
What if it was like what we thought? Joe would have a tax-free income of $78,000 plus the tax benefit of the payroll deduction therefore a tax savings of $17,160 for a total of $95,160.
Another reason to make the expenses paid by the PPP deductible, consider the self-employed taxpayer. They have their PPP loan forgiven based on their 2019 net income. The self-employed person does not have to spend the money on interest, rent, or utilities. They can receive full forgiveness based solely on the 2019 tax return.
In its “you can deduct it” notice (IRS Notice 2020-32), the IRS invokes IRC Section 265, but Section 265 does not consider how the PPP treats forgiveness for self-employed. It applies the expenses incurred to earn or otherwise produce tax-exempt income.
For Schedule C taxpayer, no such expenses to produce tax-exempt income need to be achieved for 100% forgiveness.
In a letter to Secretary of Treasury Mnuchin, Senator Chuck Gassley, chairman of the finance committee; Senator Ron Wyden, ranking member of the finance committee; and Richard E. Neal, chairman of the committee on ways and means, jointly stated that the IRS got this wrong and that the intent of the CARES Act was for the PPP to be a tax-free grant.
Guess what? The IRS is not budging. This then puts it back into lawmakers’ court and now it is their turn. To help create the action you desire, do this:
- 3612 is the Senate bill to make PPP forgiveness money used to pay business expenses tax deductible. To express your yea or nay on S.3612, contact your senators. You can find them at this link: https://www.senate.gov/senators/contact
- R. 6821 is the House bill to make PP forgiveness money used to pay business expenses tax deductible. To express your yay or nay on H.R. 6821, contact your representative. You can find him or her at this link: https://www.house.gov/representatives.
Doesn’t need to be fancy. You can fax, email, or call and simply say thank you for the support or oppose the bill. It’s easy and effective.