Practice Management Alert

Read the fine print, experts advise.

Many doctors’ offices and other healthcare businesses feel the pain of the COVID-19 pandemic on a very personal level. If they’re not overwhelmed with telehealth appointments, they’re looking at their revenue losses and wondering how to keep the lights on — and some practices are doing both, simultaneously. But keep your eyes open to this additional funding wrinkle surrounding the fine print on the Small Business Administration’s Paycheck Protection Program (PPP), part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

The Internal Revenue Service (IRS) has issued a notice negating any tax benefit of the CARES Act Paycheck Protection Program loans. 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.