The IRS undermines the objective of the PPP

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The IRS undermines the objective of the Paycheck Protection Program (PPP). In response to the COVID-19 Pandemic Public Health crisis, which morphed into an economic crisis, Congress passed. The president signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), on March 27, 2020, to mitigate the adverse economic effects of these crises on, among other things, small businesses. The legislation contained arguably certain partisan notions unrelated to the crisis which pertains to sunscreen but also contained certain bipartisan provisions, which is laudable in our dystopian environment. 

Of particular note, the PPP, which specifically authorized the Small Business Administration to guarantee paycheck loans in Section 1102 and associated loan forgiveness in Section 1106 during a specified period. The effectiveness of these provisions was dependent upon its execution by the Small Business Administration and the lending institutions, banks, charged with processing and issuing the loans. The roll-out of the PPP was not without its problems; it was and continues to be far from perfect. Arguably, the “main street” did not receive the intended benefits, which is not to say, the PPP did not help the economy.

The recent July release of recipients of SBA Paycheck Protection Program Loan Data has also raised serious questions, including the efficacy of providing loans to certain commercial enterprises. In due time, the IRS may cometh, which could add further insult to the PPP roll-out injury and pandemic crisis.  

Hidden in plain view is April 30, 2020, IRS Notice 2020-32. This notice provides guidance regarding the Federal income tax treatment of loan forgiveness and the deductibility of certain expenses when a taxpayer receives a loan under the PPP. Simply stated, the loan amount forgiven is excluded from gross income, regardless of whether it would be regarded as income or otherwise included. This IRS treatment expressly comports with the language of the CARES Act itself, and its intentions: to help small businesses keep employees on the payroll and cover certain business expenses during the pandemic.  

The deductibility of certain expenses that were off-set by loan forgiveness, however, was not expressly addressed in the CARES Act. Thus, the IRS interpreted the legislation and applied its interpretation of the Act with the existing IRS Code, regulations, and other notices concluding that deductibility is prohibited. This interpretation is based upon the concept of “double tax benefit.”  The net effect: the IRS interpretation could lead to an increased tax liability for certain recipients of loan forgiveness, which may not be obvious.

So, what Congress giveth to address the pandemic-induced economic crisis, the IRS taketh, at least in part. To stay true to the intentions of the CARES Act, either the IRS must withdraw its notice, which may not be likely given Treasury Secretary Mnuchin’s view given in an interview on May 4, 2020, with Maria Bartiromo on “Mornings with Maria,” or Congress must act in a bipartisan fashion to correct its oversight. Failure to do so, however, does not mean Congress, that is, a majority in the House of Representatives and a majority in the Senate (or even a filibuster super-majority), acquiesces and accepts the IRS Notice. It is simply a matter of institutional constructs and control of the agenda process, politics. 

Failure to correct the IRS Notice 2020-32 means the magnitude of the PPP benefit for which Democrats and Republicans in the House and Senate, and the Trump administration, seek to take credit is overstated. The CARES Act initiative has gone awry because of expediency, given the circumstances, leading to unintended consequences. And, the IRS and, by extension, the Trump administration overtly undermines the PPP, a revelation which may not necessarily be evident until tax time, absent a fix.

The PPP was to ameliorate the economic crisis; absent a fix the PPP benefits for all its fanfare is at least partially dissipated. Congress and the administration should address this matter — it is a simple fix, even as the efficacy of another stimulus package is debated based upon suspect data. Now is the time to do so as recipients of the PPP begin to prepare and file loan forgiveness documentation, or not, depending upon the circumstances. Attention to detail remains of critical importance as we move forward to address this crisis with policy initiatives.

Brian A. Marks, J.D., Ph.D., is the Executive Director Entrepreneurship & Innovation Program and Senior Lecturer, Department of Economics and Business Analytics, Pompea College of Business, University of New Haven.

Tags CARES Act Income tax in the United States Maria Bartiromo Tax Taxation in the United States United States federal legislation

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