The PPP’s Ticking Time-bomb Tax Crisis
At the beginning of this pandemic, Congress knew that quick and decisive action was critical to limit its damage to the American public and the economy. In short order, Congress passed – with huge margins – relief bills to shore up healthcare, businesses, and people’s pocketbooks. The biggest of these bills, the CARES Act, contained the Paycheck Protection Program: a lifeline to small businesses and their employees.
There has been much-deserved universal praise and recognition that the PPP saved many millions of jobs by providing funds to businesses to be used to keep employees on payroll and off unemployment. Later changes made the program more flexible to better help businesses adapt. This injection of much-needed liquidity saved jobs, kept business solvent, and, through tax revenue, even helped cities and states around the country provide necessary services to their residents.
Congress moved quickly, with bipartisan support, to get money out the door to save jobs. It almost seemed too good to be true. For too many small businesses, it was.
Here’s the catch: the language in the CARES Act is clear in its intent to make these funds tax-free to borrowers by allowing businesses that spent the funds as required on employee payroll and benefits, qualified rents and other expenses to then deduct those amounts from their business income. Small business owners took Congress at its word and accepted the funding with that understanding and expectation.
Now the Internal Revenue Service has declared that those expenses cannot be deducted, in effect creating a new tax on small businesses that will come due early next year when they file their tax returns. Business owners are only now learning of this IRS ruling as they meet with their accountants and are told the bad news. This could mean that a tax bill of close to 40% of the original loan proceeds needs to be paid by a business that has already spent all of the money in good faith as directed in the CARES Act.
Many small business owners, still struggling with COVID-19 impacts and out of cash, will have no choice but to close their doors completely. The resulting surge in unemployment across the country will be catastrophic and come just as the end of the pandemic is in sight. What a shame to ruin such a successful program with an agency ruling that is clearly in conflict with the intent of the elected officials who wrote the legislation.
Thankfully, there is a solution that could still prevent this self-made crisis. In May of this year, Sen. John Cornyn, R-Texas, and Sen. Ron Wyden, D-Ore., introduced a bill called the “Small Business Expense Protection Act of 2020” and immediately received 34 additional bipartisan senate co-sponsors. This legislation would clarify that expenses paid as required by PPP borrowers would qualify as deductions from business income, in effect making the PPP loan funds tax-free as intended in the CARES Act.
This legislation would clarify that expenses paid as required by PPP borrowers would qualify as deductions from business income, in effect making the PPP loan funds tax-free as intended in the CARES Act.
Unfortunately, this Congress hasn’t moved as quickly on this bill as it did at the beginning stages of the pandemic. That doesn’t mean the clock has stopped ticking for American small businesses and their employees.
This same Congress once acted together to save millions of American jobs. Now, as this Congressional session draws to a close, they have an opportunity to do so again. Passing the “Small Business Expense Protection Act,” would fulfill the promise made to business owners who relied on Congress’s word, kept employees on payroll, and saved our economy. There’s still time to avoid this looming tax crisis – but it’s ticking away by the day.
Bob Lewis is the Founder and CEO of Closet & Storage Concepts and More Space Place, a home improvement and furnishings franchise system specializing in custom closet systems, Murphy wall beds, garage organizers, home offices and other space-saving home furnishings. After starting the company in 1987, Bob began offering franchise opportunities in 2000. Today the company has 43 locations in 18 states. The company is headquartered in New Jersey and has manufacturing & distribution facilities in Florida that service the franchise network.
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