Restaurants with canceled PPP loans could face a tax hit
As restaurateurs wait to see if their Paycheck Protection Program (PPP) loans will be canceled, accountants and industry lobbyists warn that waiving repayment could impose a significant and often unforeseen tax burden. to borrowers.
When Congress established the PPP under the CARES omnibus law in March, it clarified that loans essentially converted to grants under the carefully defined forgiveness process would not be considered taxable income for the borrower. But in April, after the bill became law, the Internal Revenue Service (IRS) issued a ruling that business expenses paid with canceled PPP funds could not be written off as normal tax deductions. Borrowers would be responsible for about 20-30% of the remittance funds when they pay their 2020 taxes, even if the money were used exactly as Congress had set as pre-conditions for remission.
Lobbyists representing small businesses have struggled to restore deductibility through legislation, but the effort has been blunted by wrangling in Washington, DC over subsequent COVID-19 aid measures. They express their frustration that the IRS, part of President Trump’s Treasury Department, has been reluctant to reconsider its spending designation. The agency said it was simply applying the past accounting principles to a new situation. But opponents note that the interpretation goes directly against the intent of the CARES Act, which was intended in part to help small businesses survive the pandemic and keep employees on the payroll.
“This could be sorted out by the White House,” said Aaron Frazier, director of health policy and taxation for the National Restaurant Association. “If the perspective were, ‘We are in the midst of a pandemic and an economic crisis,’ this could be fixed very quickly. But supporters of a regulatory solution have come up against a stone wall, he says.
Instead, the association and its small business allies are focusing on a legislative solution in Congress. The solution is this rare piece of legislation which enjoys bipartisan support, with “the express concern of the seasoned tax writers of the [Republican-controlled] Senate and the principal fiscal drafter of the [Democrat-controlled] Home, ”says Frazier.
“All the right people, they agree to solve this problem,” says Frazier. A legislative remedy has been included in large bills such as the HEROES Act and its lightened House of Representatives measure, known on the Hill as the HEROES II Act. But no aid measure has found success in the Senate. Then President Trump ended negotiations on a compromise measure, saying any back-up plan would be put on hold until after the election. He overturned to some extent hours later, claiming by tweet that he might be willing to sign thin and narrowly focused COVID relief legislation.
“He’s absolutely still alive, in terms of ‘Let’s find a legislative solution,’ Frazier says. “The reason he’s alive is that the restaurants and other small businesses that participated in the P3 already have to put money aside for taxes, and that was not the intention.”
The legislative push has a new urgency because the Small Business Administration (SBA), administrator of the PPP, started processing pardon requests earlier this month. Some restaurants and other small businesses may not request cancellation of their loans due to tax implications, a possibility recognized by groups representing small businesses.
“Our hope is that this issue will be addressed after the election,” says Frazier, who cites two reasons for his optimism.
“Restaurants urgently need to maintain liquidity until 2021”, and the loss of deductibility weighs against this essential objective, he continues. In addition, “this will not add another dollar to the federal deficit”, since the impact of the PPP has already been integrated into the economic modeling of the federal government.
“You can include it in a bigger relief program and it doesn’t add to the deficit,” says Frazier.
“There are a lot of ways to do this,” he says of a possible solution. “Groups large and small are saying, ‘We have to step up the emergency. Find the road and let’s go.