With Congress poised to adopt a compromise COVID-19 package in the next week, a BIG outstanding issue is how loans forgiven under the Paycheck Protection Program (PPP) will be taxed. It’s literally a $160 billion sword hanging over the head of Main Street.
On one side, you have key Congressional leaders and the entire business community in agreement that Congress wanted this money to be tax-free – more than 600 trades wrote to Congress just last week! On the other hand, you have the IRS and the out-going Secretary of Treasury who calls it “double-dipping.” Here’s the case for tax-free treatment:
It’s Not Double Dipping, It’s a Tax Increase: The CARES Act created the PPP and made clear that any loan forgiveness would be tax-free. That’s how the program was sold, that’s what borrowers were told when they took out the loans, that’s what they were told when they spent the loans, and that’s how the Joint Committee on Taxation (JCT) scored the original provision. As the JCT wrote to Senator Cornyn:
Our staff understands (1) the exclusion in section 1106(i) of the CARES Act to be changing the baseline Federal income tax result, and thus (2) that the intent of that provision was not to deny deductions with respect to otherwise qualifying expenses. In other words, we understand the [Cornyn] proposal to be consistent with the original Congressional intent of section 1106(i) of the CARES Act.
Whether the IRS position is technically correct is beside the point – the IRS position isn’t what Congress intended. Restoring congressional intent is a simple, technical fix that has no impact on Federal revenues, as those costs were already accounted for in the original CARES Act.
The Money’s Already Spent. Taking it Back is a Tax Increase: The key to PPP loan forgiveness is the borrowers had to spend the loan proceeds on keeping workers employed. Under the loan terms, if you spent the money on wages and other specified costs, then you could apply to have those amounts forgiven. As noted above, those forgiven amounts were supposed to be tax-free. If they aren’t tax-free, it will be a $160 billion hit to Main Street. Where is the money going to come? The loan proceeds have already been spent, and we’re still facing shut-downs related to the pandemic.
Undermines New COVID-19 Relief: Making PPP forgiveness taxable would reduce the effectiveness of new PPP funding by half. That’s because the tax hit would apply to both existing and new PPP loan amounts. The five million first round borrowers will need to come up with $100-120 billion to pay the tax on those loans, while new PPP borrowers will need to set aside funds equal to about one-fifth of the new PPP loan amounts, or about $60 billion. Add those up, and the surprise PPP tax hit will consume more than one-half of the new PPP funds authorized in the Bipartisan COVID-19 bill. It makes no sense for Congress to give Main Street relief with one hand, only to take half of it back with the other.
There is simply no justification for taxing loan forgiveness under the PPP. It’s not what Congress intended and it will needlessly increase the pain being felt on Main Street at critical time. Main Street businesses have already endured nine months of shut-downs and economic uncertainty. Many of them operate in states, like California and New York, that are renewing their shut-down orders. The new COVID-19 relief could help these businesses survive the winter surge and get to the other side, but its effectiveness will be cut in half unless Congress defends its prerogatives and insists that PPP loans remain tax free. In the closing weeks of this Congress, it’s as simple as that.