Please sign me on to the letter that will be sent to Congressional leadership.

The Honorable Nancy Pelosi
The Speaker of the House of Representatives
United States Capitol
Washington, DC 20515
 
The Honorable Mitch McConnell
Majority Leader
United States Senate
Washington, DC 20510
 
Speaker Pelosi and Majority Leader McConnell:
 
As Congress negotiates another round of relief for families and businesses in response to the on-going COVID-19 pandemic, we strongly encourage you to include a technical correction addressing the tax treatment of loan forgiveness under the Paycheck Protection Program (PPP).  
 
When the PPP was adopted as part of the Coronavirus Aid, Relief, and Economic Security (“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.  As Section 1106(i) makes clear:    
 
(i) TAXABILITY.—For purposes of the Internal Revenue Code of 1986, any amount which (but for this subsection) would be includible in gross income of the eligible recipient by reason of forgiveness described in subsection (b) shall be excluded from gross income.
 
The publication of IRS 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 five million businesses have participated in the PPP.  More than $520 billion has been lent.  In nearly all cases, the money already has been spent keeping employees on payroll and meeting other necessary costs.  In addition to the approximate $100 billion tax hike the IRS position represents, there are numerous other complications businesses are only now recognizing – how would the denial of deductible wages affect the 199A deduction or the Work Opportunity Tax Credit?  How do you offset expenses incurred in 2020 with loan forgiveness realized in 2021?  Does disallowed interest expense avoid the excess business interest expense limitation under section 163(j)?
 
The correctness of the IRS’s reasoning underpinning Notice 2020-32 is a debatable point and if left intact will certainly result in extensive legal challenges.  What is not debatable is congressional intent regarding the tax treatment of these forgiven loan amounts.  As part of the next round of COVID-19 relief, we request that Congress reaffirm its intent and restore the tax benefits it intended to give distressed Main Street businesses as part of the CARES Act.  
 
We appreciate your consideration and thank you for your leadership during these very difficult times.
 
Sincerely,