November 23, 2020

Treasury rejects PPP tax deductions unless Congress acts

In devastating news for restaurants, the U.S. Department of Treasury is now restricting ordinary business expenses from a small business's tax deductions if paid with a Paycheck Protection Program loan. 

When Congress passed the PPP in March, legislators in both parties agreed that the forgivable portion of these loans—money used to maintain payrolls and pay other expenses including rent, mortgage and utilities—wouldn’t count as taxable income. 

It also understood that small businesses who receive PPP loan forgiveness should be allowed to deduct normal associated business expenses—including wages, rent and utilities—on their tax returns as they do every year. 

However, the Treasury Department and Internal Revenue Service recently released new guidance on how expenses should be treated if PPP loans aren’t forgiven by the end of this year. 

Essentially, the government’s position is that the expenses, whether forgiven this year or in a future year, are not deductible. The reasoning, according to Treasury Secretary Steve Mnuchin, is that the tax code prevents businesses from receiving double benefits. 

“This will create an unexpected tax liability for restaurateurs that can total 37 percent of their PPP loan amounts,” says Aaron Frazier, the Association’s director of Healthcare and Tax Policy. 

Even worse, he adds, new guidance restricts any business deductions if there is merely a “reasonable expectation” of PPP loan forgiveness. Due to ongoing uncertainty and Congressional action, restaurants and their tax advisers were planning to wait until 2021 to apply for loan forgiveness. The strategy would give restaurants additional liquidity to meet cash-flow demand when they need it most. 

However, this latest ruling from the Treasury Department creates a new expectation while clearly reducing any chance of a business being able to preserve working capital during the upcoming winter.

The Treasury’s new guidance puts additional stress on restaurants and threatens their livelihood—and even survival—in a time when pandemic restrictions continue due to surges in infections across the country.

“According to the new guidance, a restaurant that received a PPP loan and paid otherwise deductible expenses (payroll, rent or mortgage, utilities) during the covered period may not deduct those expenses for tax year 2020,” Frazier says, “even if the restaurant has not submitted an application for loan forgiveness by the end of tax year 2020.”

If the restaurant “reasonably expects to receive forgiveness,” he adds, it automatically loses these tax deductions, hypothetically over the PPP’s covered period of 24 weeks, due to use of a 10-week loan.”

The House of Representatives actually fixed the issue when it passed the updated HEROES Act on October 1, but the Senate has yet to agree to any stimulus package. The Senate has, however, addressed the need to codify the deductions into law, and introduced the Small Business Expense Protection Act (S. 3612/H.R. 6821), which the Association strongly supports.

But to get this bipartisan legislation passed, we need your help. To protect deductions and reverse this current IRS position, Congress needs to hear your voice. It’s not too late. Take action now, before Congress adjourns for the holidays. Please contact Aaron Frazier with any additional questions or feedback.