By Richard Rubin
WASHINGTON -- Congress left a loose end in March's
economic-relief law that could end up costing small businesses $120
billion in taxes, and lawmakers are still struggling to tie it
up.
Lawmakers from both parties say small businesses that get loans
forgiven under the Paycheck Protection Program should be able to
deduct associated expenses, such as wages, on their tax
returns.
Despite that consensus, Senate Republicans' latest proposal
omitted the provision. Treasury Secretary Steven Mnuchin objected
to including language that would allow the deductions, according to
a Republican aide familiar with the discussions.
Now, as Congress debates the next round of relief to counter the
impact of the coronavirus pandemic, the issue remains unsettled,
with millions of small-business tax returns hanging in the
balance.
The Treasury Department has said allowing the deductions would
provide an impermissible double benefit to businesses, because they
would be able to claim deductions and get tax-free income. Congress
could overrule that.
The issue stems from the way Congress wrote the economic-relief
law in March that created the PPP, now a $670 billion program in
which loans can be forgiven if businesses used the money to
maintain payrolls and meet certain other requirements. The law
explicitly says that forgiven loans don't count as taxable income,
but it is silent on whether ordinary tax deductions for the same
expenses are allowed.
In late April, the Treasury Department and Internal Revenue
Service determined that businesses couldn't also take deductions,
citing a section of the tax code that prevents such double
benefits.
Mr. Mnuchin called it "Tax 101" in defending the Treasury
decision but hasn't expressed a public view on the proposed
legislation that would overturn that decision. A spokeswoman
declined to comment Tuesday.
A House relief bill, passed in May, included a provision
allowing the tax deductions. Key Senate Finance Committee members,
including Chairman Chuck Grassley (R., Iowa), top Democrat Ron
Wyden of Oregon and John Cornyn (R., Texas), also want to allow the
breaks.
They are backed by business groups, such as the National
Federation of Independent Business, which said Tuesday that it was
disappointed to see the idea dropped from the GOP bill.
In a statement, Mr. Cornyn blamed Washington bureaucrats for a
"hidden tax increase" and said his proposal would just clarify what
Congress meant back in March.
"This bill creates no new tax breaks and costs nothing," he
said.
Allowing the deduction would give businesses more than $120
billion, according to Steve Rosenthal of the Tax Policy Center.
Much of that would go to high-income business owners such as
doctors and lawyers, he said.
Consider a simple example -- a business with $100,000 in loan
forgiveness and a 22% tax rate. Currently, the $100,000 wouldn't
count as income, and the business couldn't take $100,000 of
deductions. Under the proposal advanced by Mr. Cornyn, Rep. Lizzie
Fletcher (D., Texas) and others, the $100,000 wouldn't count as
income and the business could get deductions worth $22,000.
That would be helpful even for businesses that are losing money,
because they can use current losses against past years' income to
claim refunds.
The IRS decision came as a surprise to Mike McKenny, president
of Assured Vehicle Protection Inc., a 15-employee insurance-claims
business in Mission, Kan., that took a PPP loan.
"It was a little kick in the gut after you had a swift pat on
the back," said Mr. McKenny.
Already, some business owners are paying more on their quarterly
estimated taxes to reflect the lack of deductions, said Joe
Kristan, a partner at the accounting firm Eide Bailly LLP in Des
Moines, Iowa.
"It's a live issue now and will obviously be a bigger live issue
as you get close to year-end," he said. "Because the stakes are too
high, somebody's going to [claim deductions and] litigate it if the
bill isn't passed, and others will just hope they fly under the
radar."
Lawmakers say they wanted companies to get the deductions. The
Joint Committee on Taxation, the nonpartisan staff that estimates
tax legislation, said in a July 27 letter to Mr. Cornyn that it
agreed with that understanding of congressional intent and didn't
assume in March that PPP changed which expenses could be
deducted.
That means that overriding the Treasury Department's decision
won't officially add to federal budget deficits, because it is
viewed as clarifying what Congress did in March. But compared with
doing nothing, the proposal would, in fact, reduce tax collections
by tens of billions of dollars or more.
"It could be an unpleasant surprise at the end of the year,"
said Matt Turkstra, director of tax, fiscal affairs and accounting
at the Associated General Contractors of America. "This is
definitely something that was a disappointment."
Write to Richard Rubin at richard.rubin@wsj.com
(END) Dow Jones Newswires
July 29, 2020 11:53 ET (15:53 GMT)
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