When COVID-19 hit, Congress wanted to keep employees on the payroll rather than in the unemployment line. Now, the IRS states businesses who paid employees with Paycheck Protection Program dollars, will have to pay taxes on that money.
While there may be a light in sight at the end of the tunnel of the COVID-19 with the roll out of a vaccine, small businesses are still struggling. Many Iowans have seen businesses in their towns shut their doors, sometimes temporarily, and unfortunately, sometimes permanently. These closures affect people’s lives deeply, from business owners and their employees, to consumers and the heart of communities themselves.
Understanding the dire situation that many businesses and their employees were facing during the pandemic, Congress passed the Paycheck Protection Program (PPP) as part of the CARES Act to give businesses a lifeline. The primary goal of the PPP was to keep employees on the payroll rather than in the unemployment line. As its name implies, the PPP program was designed to help prevent the unemployment rate from skyrocketing, as businesses could no longer afford to pay their employees when so much commerce dried up.
Considering the circumstances to be extraordinary, Congress made these loans forgivable. Business would not have to pay back the loans if used for qualifying expenditures, specifically payroll costs and standard building expenses such as rent and utilities. Congress’s intent was to temporarily replace the revenue that had suddenly disappeared for so many businesses.
The PPP program has been widely utilized by small businesses across the country, with over 5.1 million businesses receiving PPP funding. Estimates for jobs saved by the program range from 13.6 million to 51 million. Regardless of the exact number of positions and businesses that benefited from the program, the PPP has had a real impact on the lives and livelihoods of Americans across the country.
Many recipients of PPP, and indeed many members of Congress, believed these forgivable loans to also be non-taxable. Unfortunately, a new hurdle exists for those businesses who accepted PPP loans. While the intent of Congress was clearly to make these loans completely forgivable and tax-free, it seems that the Internal Revenue Service (IRS) did not get the memo. IRS Notice 2020-32 states that “no deduction is allowed under the Internal Revenue Code…if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the [CARES Act].”
Let us simplify that statement: if a business took a PPP loan and paid their employees with it, the business now owes tax on that money.
By disallowing the deduction for the expenses covered by PPP dollars, small businesses’ 2020 federal tax bills could increase substantially. This directly undermines the intent of Congress by transforming what was meant to be a tax-free, forgivable loan into taxable income.
And what does this mean for taxes businesses pay in Iowa? Iowa’s Department of Revenue has stated, “Iowa generally conforms with tax provisions of the CARES Act to the extent they affect Iowa income taxes for tax years beginning on or after January 1, 2020.” Iowa will follow suit with wherever the federal government lands on PPP.
Congress can and must act quickly to clarify its intent and override this IRS ruling. 2020 has already been tough for small business, and without action, this tax season could bring even more uncertainty and pain for struggling small businesses. Small business is the heart of America and the lifeblood of towns of all sizes across the country. Small businesses employ our neighbors, friends, family, and even some of us. They support our local nonprofits when business is good and go the extra mile when called upon for an odd job. If PPP loans were intended to save jobs and small businesses, it is imperative that Congress act to ensure that these jobs and businesses are safe from this tax hurdle that, for many, may prove to be insurmountable.
Now is the Time to Take Action!
Tell Congress that small business relief dollars should not be taxed.
Use the button below to email Senator Grassley, Senator Ernst, and your U.S. Representative: