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.
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 businesses, and without action, this tax season could bring even more uncertainty and pain for struggling small businesses. It is imperative Congress act to ensure that these jobs and businesses are safe from this tax hurdle.
ITR has contacted Iowa’s federal delegation about this critical issue and now we invite you to make your voice heard, too.