PPP borrowers get tax break the IRS tried to reverse

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Much to the relief of millions of small business owners, the new stimulus program includes a Paycheck Protection Program (PPP) tax break that Congress intended to include in the CARES Act but did not. Lawmakers from both parties love it. Treasury Secretary Steven Mnuchin doesn’t like it at all.

A coalition of some 500 national, regional and state professional associations urged Congress to include tax relief in the new bill in order to “avoid an avoidable disaster for millions of small businesses”. Without the fix, many of the 5 million PPP loan recipients would have faced a bad surprise when they did their taxes next year.

To get their loans canceled, they had to spend P3 money on payroll, mortgage interest, rent, and utilities – expenses that make up the vast majority of the costs of keeping a small business open. When a loan is canceled, the IRS normally considers it taxable income, but the CARES Act clarified that this would not be the case with PPP loans. Congress forgot to address another key question, however,: Would those operating expenses – the ones small businesses had to pay to get their loans forgiven – be tax deductible as usual?

Many business owners have assumed so. A IRS statement little noticed in May, issued after many business owners borrowed money, said the opposite. The result: Small business owners would find their taxes for the worst year they’ve ever seen would be much higher than expected. Now the new stimulus package will spare them that pain, provided President Trump signs it into law.

So why did Mnuchin oppose the fix? Because it allows loan recipients to “double down,” he said, and he’s right. If a small business owner receives, say, $ 100,000 of free money that is spent on deductible expenses, and then is allowed to deduct those expenses without having to report the $ 100,000 of income, that is actually a double deduction. That’s why even some progressive groups, including Americans for Tax Fairness, have also opposed the new deductibility rule, which they say will benefit some wealthy business owners who don’t need to ‘help.

Nonetheless, the new deductibility rule is one of those few ideas that both sides largely agree on, supported by Conservative Republican Senator John Cornyn of Texas, Liberal Democratic Senator Ron Wyden of Oregon and most of those in between. They understand that the rule is a gift for small businesses. And in light of the overwhelming economic damage from the pandemic – and the political clout of small businesses in every state and congressional district – it suits them perfectly.

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