Negotiations over the next COVID-19 relief package are in full swing – finally! – and the business community has united around one key must-pass item:  Restoring congressional intent and avoiding a $120 billion tax hike on Main Street business by clarifying the correct tax treatment of PPP loans.

That’s the message conveyed today by today’s letter initiated by the Associated General Contractors and signed by 564 national and state-based trade groups.  564!  That’s got to be a record, and the fact those signatories were gathered in the matter of just two days should send a very emphatic signal to Congress as to how much of a priority this is.  As the letter states:

At the onset of the COVID-19 pandemic, Congress responded with speed, cooperation, and an eye to preventing the worst potential economic outcomes. We ask that you bring that same spirit of urgency and cooperation before the end of this session to prevent an avoidable catastrophe for millions of small businesses that, without Congressional action, will face a surprising, and, in many cases, insurmountable tax bill next year.

The primary goal of the PPP was to keep workers on payroll and off UI.  The size of the loans was tied to an employers’ payroll and, to qualify for loan forgiveness, the employer needed to spend the loan amount within a limited period of time keeping workers employed.  Consistent with this goal that the PPP loan proceeds should be spent quickly and on workers, Congress made clear any loan forgiveness would “be excluded from gross income” for tax purposes.

Despite this clear intent, the IRS issued Notice 2020-32 that ruled that forgiven amounts would continue to be tax-free, but the expenses used to qualify for loan forgiveness would no longer be deductible.  In practical terms, the result is the same as if the forgiven amounts were fully taxable.

While the correctness of the IRS position continues to be debated, what is not debatable is congressional intent.  Congress intended these forgiven amounts to be tax free, and failure to follow through on this policy will have significant negative consequences on Main Street.  As the letter notes:

Many PPP loan recipients retained employees on their payrolls, even when there was little to no work to perform, in compliance with the intent of the program to keep people employed and off the unemployment rolls. The IRS changed the rules after businesses took out PPP loans, and business owners are now being asked to pay what amounts to a surtax on their workforce. Without Congressional action, businesses will face an unexpected tax bill when they file their taxes for 2020, as they continue to struggle with government mandated shutdowns or slowdowns. Many of those businesses will close and never re-open. This senseless tax policy stands both the letter and spirit of the PPP on its head. 

With Congress actively negotiating a new COVID-19 response, they have an opportunity to correct this wrong.  Five hundred and sixty-four trade associations representing practically the entire private sector are imploring Congress to take action.  Let’s hope Congress is listening.