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Loan Forgiveness Deductions Left in Hands of Congress

May 1, 2020, 5:43 PM

The IRS, backed into an interpretive corner, eliminated some potential extra benefits of a massive loan program that is part of the government’s virus response—and it’s on lawmakers to fix it if they disagree, tax professionals said.

In the Thursday guidance (Notice 2020-32) the agency said expenses that qualify businesses for forgiveness of loans under the Paycheck Protection Program won’t generate federal tax deductions. This decision “prevents a double tax benefit” since the forgiven loans aren’t included in taxable income, the guidance said, following a standard under tax code Section 265.

There are arguments for both stances, tax professionals said. But the relief law creating the program (Public Law 116-136) was silent on the question.The lack of deductibility means that struggling businesses won’t be able to lower their taxable income at a time when they need all the help they can get. The issue could be addressed in a future package, which lawmakers are starting to negotiate.

“When Congress doesn’t state something, the IRS tends to be conservative,” said Babson College tax professor Norm Richter, a former Treasury official and former Senate tax counsel.

The in-demand program offered loans so that businesses struggling due to lost business and forced closures could avoid laying off workers and going under. Businesses that receive the loans don’t have to pay them back if they spend the funds on employee payroll, rent, mortgage interest, and utilities over eight weeks.

“It certainly makes it a lot less attractive if you don’t get the deductions,” said Joe Kristan, a partner at the accounting firm Eide Bailly LLP in Des Moines, Iowa.

He added that he expects the IRS to face pressure from lawmakers, or for lawmakers to change the treatment of the expenses through future legislation.

“We are planning to fix this in the next piece of response legislation,” a spokesperson for House Ways and Means Committee Chairman Richard Neal (D-Mass.) said in an email.

On the Hill

Senate Finance Committee Chairman Chuck Grassley (R-Iowa) expressed disappointment with the IRS guidance, saying in a statement that the issue was discussed during the development of the program.

“The intent was to maximize small businesses’ ability to maintain liquidity, retain their employees and recover from this health crisis as quickly as possible,” Grassley said. “This notice is contrary to that intent.”

A spokesperson for Grassley didn’t respond to questions as to whether he planned to request that the agency reverse its stance or whether he would seek to incorporate a legislative reversal into the next Covid-19 stimulus law.

“Congress, if they disagree with the IRS’s position, will need to clarify this in the next relief package that will be coming later this month,” said Nicole Kaeding, vice president of policy promotion and economist at the National Taxpayers Union Foundation.

If others agree with Grassley, Kaeding added, she expects “they would clarify this in the next bill.”

The IRS could have gotten flack for allowing the deductions, tax professionals said, as the agency could be seen as effectively legislating. The agency didn’t immediately return a request for comment.

“They’re there to administer the law, not to make it, and that’s exactly what they’re doing,” said Matt Gardner, a senior fellow at the Institute on Taxation and Economic Policy.

To contact the reporter on this story: Lydia O'Neal in Washington at loneal@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com

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