WASHINGTON – Congress could be willing to offer business owners who have taken out Paycheck Protection Program loans a tax break of hundreds of billions of dollars.
The provision, which is part of the year-end discussions on the Coronavirus Relief Act, would ensure that PPP recipients can deduct wages and salaries and other costs that are covered by loans made, even though the loans themselves are tax-free income . The move would reverse a Treasury Department decision denying the deductions.
Lawmakers say it just wants to be clear about what Congress was up to in creating the PPP and prevent unexpected tax burdens from hitting business owners. According to Adam Looney of the Brookings Institution, a former Obama administration official, a full withdrawal could cut federal revenues by about $ 200 billion, with the majority going to very high-income households.
A bipartisan agreement exists in Congress to overturn the Treasury Department’s decision that denied deductions and frustrated business owners. Some progressive groups and Treasury Secretary Steven Mnuchin argued that the combination of tax-free income and deductible expenses was a double immersion, but the lobbying clout of corporate groups and senior lawmakers in both parties contradicts this view.
“We all hope that Congress just cleans this up and takes everything off the table so our clients can relax,” said Christopher Hesse of accounting firm CliftonLarsenAllen LLP, chairman of the tax executive committee at the American Institute of Accountants.
The problem has subsided since Congress launched the PPP in late March. The program offered low-interest loans with the promise of forgiveness if companies keep paying their workers.
Treasury Secretary Steven Mnuchin views the combination of tax-free income and deductible expenses as a double immersion.
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Sarah Silbiger / Pool Via Cnp / Zuma Press
The law’s authors attempted to address the possible tax ramifications by stating that these loans issued – unlike typical loans issued – would not qualify as taxable income. However, the law did not say anything about whether companies could still deduct salaries and other loan-funded expenses.
In April, Mr. Mnuchin and the Internal Revenue Service said no and denied the deductions.
Legislators argued that they intended to allow the deductions and that the rejection was against the purpose of making income tax free in the first place. But Mr. Mnuchin wouldn’t move. Without action by Congress, some business owners would likely seek to challenge the IRS in court on whether the agency’s rule complies with tax law, Hesse said.
According to the Treasury Department’s decision, a company receiving a $ 100,000 loan would not consider it income and would have to forego $ 100,000 deductions. In many cases, the loss of these deductions is mathematically equivalent to the taxation of the PPP loan.
Instead, as proposed by lawmakers, the $ 100,000 loan would not be income, and the company could deduct $ 100,000 in related costs. For a top-tax business owner, that translates to a $ 37,000 difference and would make the PPP loan more of a tax-free state benefit.
“This is huge money. You could do a lot better with it, ”said Frank Clemente, executive director of Americans for Tax Fairness, a progressive anti-deductibility group.
But many democratic lawmakers support the deductions.
Trade associations ran a campaign to get Congress to overturn Mr. Mnuchin’s decision. Entrepreneurs say the point of the PPP program was to cover these expenses and not put cash for any use. They find that they had to bear these deductible expenses in order to receive the loan.
“The government gave us these PPP loans to pay our team. We did that, ”said Janice Jucker, co-owner of Three Brothers Bakery in Houston. She said she was facing a $ 100,000 tax charge that would suck up money she’d rather open a new location with.
Tracy Vaught, a Houston restaurant owner, says many businesses expect tax deductions.
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Allison Hess / Bloomberg News
“Everyone was so concerned about just surviving that it wasn’t really on everyone’s radar. Now everyone is talking about it and they are concerned about it, said Tracy Vaught, owner of H-Town Restaurant Group, which owns four restaurants in Houston. “The whole idea of paying taxes after all this is fair – it’s like Congress has to be deaf not to correct this.”
Ms. Vaught said her downtown location is still having problems in an area where there are no office workers or convention attendants.
“We’ll have the money to pay them, but I think a lot of people won’t,” she said. “It was almost a bait and switch.”
Oddly enough, the major benefit for business owners doesn’t count towards the cost of the bill. This is because the Joint Tax Committee, which makes revenue estimates for tax bills, assumed that lawmakers had intended to allow the deductions in March and now just clarifies that intention.
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But the tax cost of the PPP was also not listed as part of the cost of the March bill, as the Scorekeepers assumed the deductions would pass without the PPP and that the tax-free lending hadn’t changed anything.
This quirk means that allowing the deductions does not cost the government anything for valuation purposes, even though it allows billions in deductions that otherwise would not be possible in the Treasury Department’s judgment. Congress can use this provision to pump more money into the economy and offer tax cuts to corporations without crowding out other programs within the overall relief bill, where Republicans insisted on overall size limits.
“Both an income exclusion and a deduction are provided,” said Richard Reinhold, who teaches tax law at Cornell University. “The result is a likely hundreds of billions of dollars in tax revenue loss that has never been made or disclosed.”
Write to Richard Rubin at [email protected]
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