Surprise IRS Tax Increase Avoided, Federal PPP Deductibility Restored

Date: February 04, 2021

The voice of small business was heard loud and clear

Shortly after many small business owners welcomed a Paycheck Protection Program (PPP) loan to keep their workers employed and businesses up and running, a massive question arose: Would a large portion of the loan unexpectedly need to go back to the federal government in the form of a surprise tax increase?

PPP is a signature federal COVID-19 recovery program enacted in early 2020 that offers federally guaranteed loans for small businesses and the self-employed. PPP loans can be totally or partially forgiven for businesses that spend them on qualifying expenses within a specified time period.

Sylvia, an NFIB member in Vermont praised the PPP’s effects for her business, “We used the funds on salaries, utilities fees, employee costs, and interest payments. Thanks to the PPP loan, I was able to retain both of my employees.”

However, on April 30, 2020, the IRS issued Notice 2020-32, which disallowed the tax deductibility of PPP forgiven expenses. This regulatory decision was issued after the vast majority of businesses (74 percent) had already received PPP funding. This IRS action translated to a surprise tax increase on unsuspecting small business owners struggling to keep afloat during the pandemic. It was needlessly harmful to the small business economy’s recovery efforts and contrary to the Congressional intent of the PPP.

NFIB and many business owners immediately called on Congress to re-assert its intent for the Paycheck Protection Program and prevent the IRS’ surprise tax increase on small businesses. A few of the many messages delivered to Congress using NFIB’s grassroots action alerts included:

  • Chris from Carson City, Nevada called on his members of Congress, “I run a business that employs 18 people and my bottom line at year end is almost exactly what the PPP loan amount afforded me. If you do not restore the deductibility of forgiven PPP expenses now, how do you expect people who are struggling to be able to cover that tax bill?”
  • Anthony from Covina, California shared his story, “My business services the foodservice and hospitality industry and it has been severely impacted by the shutdown of hotels and restaurants. I spent 14 years building a successful service business and COVID-19 is threatening to kill it. The first PPP loan allowed me to rehire my employees, but those funds ran out months ago and my business is again heading towards financial ruin. I am very concerned about the tax implications of not allowing the PPP expenses to be deductible. Last thing I can afford now is a big tax liability in the spring.”
  • John from Statesville, North Carolina urged action, “I have been given a second chance by the PPP funding. For God’s sake, please don’t turn around and take part of it back! Do not tax us on the PPP money that we broke our necks to apply for and we used to keep people working. If I am unable to deduct forgiven PPP expenses, I will have to close my doors and put 11 people out of a job.”

Eliminating this surprise tax increase was a key issue at NFIB’s annual Fly-In, a national small business advocacy event where NFIB members met with congressional lawmakers and educated them on small business priorities. Jeanne, an NFIB member in Holyoke, Massachusetts underscored the IRS Notice’s problematic change to the PPP, “The IRS changed the rules after I signed on the dotted line.”

NFIB’s small business advocacy efforts continued throughout 2020 and business owners continued to educate legislators on the IRS Notice’s harsh consequences for an already struggling Main Street. Finally, the federal COVID-19 recovery package enacted in December 2020 reversed the IRS ruling, now allowing tax deductions for PPP forgiven expenses. The new law clarifies that PPP loan recipients will not receive surprise tax increases this spring.

NFIB’s Director of Grassroots, Jessica Cooper, praised the advocacy effort saying, “Thank you to the NFIB members who took time to share their stories. When our members speak-up, Congress listens.” Cooper added, “We were glad to see Congress heard the voice of small business on this crucial issue because avoiding this surprise tax increase is welcome support for Main Street – especially at a time when one-in-four small businesses say they will have to close their doors if economic conditions do not improve in the next six months.”

The tax deductibility of forgiven PPP loan expenses is an issue that many state legislatures are now grappling with as well. NFIB is in all 50 state capitals and where needed, advocating for state tax codes to allow the deductibility of forgiven PPP expenses. Learn more about what expenses are deductible and if the PPP loan can be taxed on the state level in your state.

NFIB wants to hear from you on the PPP program and additional business friendly tax provisions in the latest COVID-19 Recovery law. Complete the brief survey today.

For more information on the many hard-fought victories for small businesses in December’s COVID-19 recovery law, read NFIB’s COVID-19 recovery 2.0 fact sheet.

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