Home Health & Hospice Week

The complications of COVID-19 funding relief continue to pile up.

This time: The Internal Revenue Service has issued a notice negating any tax benefit of the CARES Act Paycheck Protection Program loans/grants.

Regarding PPP loans, the law enacted March 27 states that “for purposes of the Internal Revenue Code of 1986, any amount which … would be includible in gross income of the eligible recipient by reason of forgiveness described in subsection (b) shall be excluded from gross income.”

But in April 30 guidance, the IRS says “no deduction is allowed ...for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan.” Section 265(a)(1) of the Internal Revenue Code prevents a “double tax benefit,” and therefore makes PPP loans taxable if they are converted to forgiven grants, explains Notice 2020-32.

In other words: “Notice 2020-32 effectively makes the loan forgiveness taxable to the recipient,” explains Morgantown, West Virginia-based consulting firm The Health Group in its electronic newsletter.“A taxpayer that receives a loan through the Paycheck Protection Program (PPP) is not permitted to deduct expenses that are normally deductible under the Code, to the extent the expenses were reimbursed by a PPP loan that was then forgiven.”

The IRS notice comes as a surprise to many.“This guidance is unexpected considering Congress expressly excluded the PPP loan amounts from gross income,” say attorneys Jeffrey Markowitz, Kimberly Gilreath, and Meg Machester with law firm Miles & Stockbridge.“If amounts were not excluded from gross income, the tax result would be the same,” they say in online analysis.

The “unusual result” seems “contrary to the purpose of the CARES Act and adds to the unpredict­ability surrounding the PPP,” the attorneys say.

“Many, if not most, taxpayers probably did not expect this result ...given the announced overall goals of supporting both payroll and small business survival,” say attorneys Patrick Cox, Christopher Mason, and Morgan Nighan with law firm Nixon Peabody. Potential PPP loan/grant recipients may want to consider other, better options, they say.

“In some cases, a prospective loan recipient may be in a better financial position if it does not obtain a PPP loan,” the Miles & Stockbridge attorneys caution. For example, companies that don’t use all the proceeds for eligible expenses and have to pay a portion back, and pass-through entities may fare better not taking the loans at all, they suggest.

Situation Remains Fluid

However, the IRS notice may not be the last word. Senate Finance Committee Chair Chuck Grassley (R-Iowa), Ranking Member Ron Wyden (D-Ore.), and House Ways & Means Committee Chair Richard E. Neal (D-Mass.) sent a May 5 letter to Treasury Secretary Steven Mnuchin, noting the guidance “ignores the overarching intent of the PPP, as well as the specific intent of Congress to allow deductions in the case of PPP loan recipients.”

The PPP loans/grants are supposed to provide “a lifeline” and “critical relief to America’s small businesses that are experiencing unprece­dented economic disruption,” the letter continues. The CARES Act “in effect mak[es] the loan a tax-free grant,” the lawmakers insist.

“We urge you to reconsider this determi­nation in light of congressional intent and the importance of maximizing liquidity for businesses receiving PPP loans to survive and recover from the ongoing health crisis,” the letter concludes.

What now? “The IRS could … be pressured into withdrawing the notice,” allows Kirk Mitchell with CPA firm Schneider Downs. Other avenues of change may be a legislative fix in the next coronavirus relief package, or a court case, Mitchell says in online analysis.

Note: IRS Notice 2020-32 is at www.irs.gov/pub/irs-drop/n-20-32.pdf.