AICPA URGES CONGRESS TO ALLOW PPP LOAN EXPENSE DEDUCTIONS

Dear WZ Clients, Business Associates and Friends,
The AICPA joined with more than 170 business and trade organizations in asking congressional leaders to allow businesses to write off expenses paid for with Paycheck Protection Program loans that have been forgiven.
The letter, addressed Tuesday, Aug 4, 2020 to House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell, urged Congress to make a technical correction to fix the tax treatment of loan forgiveness on PPP loans. The letter asks Congress to reverse an IRS Notice 2020-32 that denies borrowers the ability to deduct the same expenses that qualified them for loan forgiveness. However, the groups argue that this goes against the intention of the CARES Act. The groups contend that the IRS notice got the intent of the legislation wrong and argue against the interpretation of Treasury Secretary Steven Mnuchin, who has rejected previous appeals on the matter.
When the PPP was adopted as part of the CARES Act, Congress made clear that any loan forgiveness under the program would be excluded from the borrower’s taxable income. Specifically, a recipient of a PPP loan was eligible for forgiveness of indebtedness for amounts equal to certain payroll, mortgage interest, rent, and utility payments made during a prescribed period, with any resulting cancelled indebtedness excluded from the borrower’s taxable income.
The IRS issued Notice 2020-32 effectively overturned this policy by denying these borrowers the ability to deduct the same expenses that qualified them for the loan forgiveness. The Notice argues Section 265(a)(1) of the 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. Defenders of the IRS’ position argue that allowing businesses to deduct these expenses would result in business owners receiving a ‘double’ benefit. This is simply untrue. Congress intended for the loan forgiveness under PPP to be tax-free. The IRS Notice reverses that position and eliminates any benefit, let alone a double benefit. If a business has $100,000 of PPP loans forgiven and excluded from its income, but then is required to add back $100,000 of denied business expenses, the result is the same as if the loan forgiveness was fully taxable. Section 1106(i) becomes moot if the IRS Notice is allowed to stand. On the other hand, denying the correct tax treatment of these loans will result in hardship for many struggling businesses.
More than 5 million businesses have participated in the PPP and over $520 billion has been lent to businesses through the program.
As part of the next round of COVID-19 relief legislation, the groups are asking Congress to clarify the matter by restoring the tax benefits as intended under the CARES Act to help distressed businesses.
Separately, on Tuesday, the U.S. Small Business Administration released a set of questions and answers on PPP loan forgiveness. Here’s the link:
PPP Loan Forgiveness FAQ’s (as of Aug 4, 2020)
There are three notable clarifications in the PPP Loan Forgivenss. They involve accelerated payments of health care coverage and retirement plan contributions; payments made under agreements executed prior to Feb. 15, 2020; and the definition of transportation costs that are eligible for loan forgiveness. Unfortunately, like the SBA’s previous guidance for mortgage interest, the FAQ document says forgiveness is not provided for expenses for group health benefits or retirement benefits accelerated from periods outside the covered period or the alternative payroll covered period.
For payments under lease or mortgage agreements to be eligible for loan forgiveness, they need to be related to an agreement before Feb. 15, 2020. However, the FAQ expands that guidance to clarify that if a lease existed before Feb. 15 and expires on or after that date and is renewed, the lease payments made under the renewed lease during the covered period are eligible for forgiveness. Similarly, if a mortgage loan on real or personal property that existed before Feb. 15 is refinanced on or after that date, the interest payments on the refinanced mortgage loan are eligible for forgiveness.
The FAQ also clarifies exactly what qualifies as transportation costs and eligible expenses for loan forgiveness related to a service for the distribution of transportation refers to transportation utility fees assessed by state and local governments. Guidance relating to transportation has been vague until now.
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Best,
WZ Partners

Wagner & Zwerman LLP