PPP Congressional intent is PAYCHECK Protection, not Profit Protection - shame AICPA

[Rapid Robert]

I was not going to apply, but my banker called me to apply. By that time, I had clients asking to pay me on installments. I thought I might keep most of my clients, but many would be paying me more slowly. And, I really wasn't going to be able to raise prices commensurate with all the courses I was taking/reading I was doing/time I was spending explaining the new laws to my clients. So, I decided that I was effected by Covid and applied. I still have a handful of long-time clients who have not paid me yet. Covid definitely effected my cash flow. The small (much smaller than 16k) loan helped me pay my bills while waiting for clients to recover financially and pay me.

Funny how there are so many types of tax practices. Not a single one of my clients even mentioned not being able to pay me, even though quite a few fell into the Apr 15-Jul 15 filing window and beyond. And these were all returning clients from prior year. On the other hand, I don't have a banker, so there was no incentive for any bank to foist a loan onto me that I didn't really need.

"it is clear that Congress MEANT it to be totally free money, but just failed when writing things out. They specifically made it non-taxable, which to me means they meant it to be completely 'free' money."

Yes, exactly (except for the "failed" part). It is "free" money to the business, in that it neither increased taxable income nor added to tax deductions. The business owner had no out of pocket expenses, so no tax harm, no tax foul.

Shame on AICPA for confusing the issue, so that some (including Congresspeople) incorrectly think that somehow business owners are suffering some extra tax due to a Congressional drafting error.

A business owner who received government-funded pay as part of their operation faces about the same taxes as all the other employees who were the intended beneficiaries of the PPP.

Meanwhile, for a long time we've been told that "job creators" only need more tax cuts to create more jobs, and we'll be zooming along (the pre-2020 meaning of zoom). So, now via TCJA the businesses have huge corporate tax cuts, they have QBI (even the landlords!), and they have EIDL and PPP handouts. So when are they going to uphold their end of the bargain and start creating some jobs? Put another, more palatable way, was the PPP for job creators, or for job workers?

[Scarecrow]

They specifically made it non-taxable, which to me means they meant it to be completely 'free' money. Otherwise, there really would be no point in them stating it was non-taxable.

Congress also wrote into law that Municipal bond interest is non-taxable. Does that mean they meant it was free money that could be used to deduct expenses with? And why did Congress write into law code section 265, if non-taxable income means "free money" to be used for tax deductible expenses?

[New York Enrolled Agent]

Congress also wrote into law that Municipal bond interest is non-taxable. Does that mean they meant it was free money that could be used to deduct expenses with? And why did Congress write into law code section 265, if non-taxable income means "free money" to be used for tax deductible expenses?

Scarecrow - you have posted some valid points in this thread but I think perhaps you're overstating this disallowance of expenses.

§265 does have a limitation but there needs to be a link between the income and the expenses. Suppose a taxpayer has a checking account into which various sources of income are deposited - deposits include a pension, dividends from stocks, a Schwab investment account that contains some municipal bond funds in the portfolio and so-on. Taxpayer makes a valid charitable contribution of $300 to his church. Assuming the taxpayer does not itemize, are you not going to enter this $300 deduction on line 10b of the 2020 Form 1040 because there is some muni interest deposited into his checkbook???? I seriously doubt you won't take the deduction.

The IRS used Rev Ruling 83-3 as part of its analysis. But Rev. Rul. 83-3 looks to the direct link between the payment and the tax-exempt income.In all three situations, the taxpayer has incurred expenses for the purposes for which the tax-exempt income was received. Permitting a full deduction in each situation would lead to a double benefit not allowed under section 265 of the Code.

Likewise the IRS in Notice 2020-32 writes Section 265(a)(1) of the Code applies to otherwise deductible expenses incurred for the purpose of earning or otherwise producing tax-exempt income. It also applies where tax exempt income is earmarked for a specific purpose and deductions are incurred in carrying out that purpose.

My bottom line - don't use an analogy between PPP and typical muni interest. I don't think it works. You need a link and that seems to be the case with PPP money.

[TaxGuyBill]

Congress also wrote into law that Municipal bond interest is non-taxable. Does that mean they meant it was free money that could be used to deduct expenses with? And why did Congress write into law code section 265, if non-taxable income means "free money" to be used for tax deductible expenses?

Your reasoning does not make sense. Municipal Bonds being non-taxable is a separate tax benefit which is usually not for business purposes. It is mostly a personal benefit. But §265 was made for the times when it is tied to a business, to avoid the 'double dip'.

But PPP forgiveness is purely for businesses. The fact they specifically stated it was non-taxable must have meant SOMETHING. Not using the deductions due to §265 makes the non-taxableness of the PPP forgiveness mean NOTHING (well, except for Sole Proprietorship's owner replacement). So to me, the fact that Congress SPECIFICALLY stated it is non-taxable makes it obvious to me it was meant to be completely free (and being able to deduct expenses). They just didn't write it well enough.

[Lion]

I had three clients pushed into retirement at their employer's insistence, a handful with hours/wages cut to 80% or less, many that did not work/get paid for a few weeks, some of those called back but only part-time, and many clients who asked for their hours/wages to be cut to accommodate closed schools/daycare and the time needed to homeschool/supervise remote learning of their children. Most clients have paid in full now, but I had to make payments for my software back in August and September, and other biz expenses renewed during the summer. So, that PPP loan did carry me through this tax season. I'm down to only two clients who still have balances due: one of those retirees whose wife had medical issues and couldn't work this year plus a family dealing with educating two children who took some hours/wages cut until the end of this year. Both have told me they are sending their final payments this month. Cash flow was different this year with April being pushed to July and then those who needed to make payments instead of a lump sum. I was glad I got a PPP loan.

[ATSMAN]

Both have told me they are sending their final payments this month. Cash flow was different this year with April being pushed to July and then those who needed to make payments instead of a lump sum. I was glad I got a PPP loan.

I am not sure if this is regional or not but a few of my business clients facing severe cash crunch still owe me money! Because of COVID I have not been hounding them, but I did tell them that my expectation is that they will pay me before I do the work for 2020 returns.

[Rapid Robert]

The fact they specifically stated it was non-taxable must have meant SOMETHING. [...] So to me, the fact that Congress SPECIFICALLY stated it is non-taxable makes it obvious to me it was meant to be completely free (and being able to deduct expenses). They just didn't write it well enough.

You keep on making this extraordinary claim without any evidence beside wishful thinking. Making it non-taxable of course did mean something - the CODI that would normally apply is excluded from gross income. That's what they wrote, that's what they meant.

You are saying Congress made a mistake, IRS made a mistake twice, and despite having adequate time to "fix" it, they have not done so. Where is the evidence? Congress was able to come up with all kinds of details regarding testing periods, types of expenses, etc etc but they somehow missed what you claim was the main point of the act?

Let's start with the name of the act - PAYCHECK protection, not profit protection. It was intended to protect paychecks. If it were intended to simply protect overall business profit, then why was it tied so closely to wages? The EIDL already existed for the purpose you claim, so why would they spend time coming up with PPP when they could have simply modified EIDL to accomplish what you are looking for?

Here's something to research - what was included in the CBO (Congressional Budget Office) report as for the cost of the legislation? Was it 100% of loan forgiveness, or 140%, to include all the tax deductions you are arguing for?

Meanwhile, we get deliberatey deceitful news coverage like this recent article from Fortune. Note that publications like Forbes have been pounding this drumbeat all year long, it if was so clear cut, surely Congress would have responded with a "fix" by now.

"The IRS effectively canceled the tax break that made PPP loans so valuable to small businesses." No, they didn't "cancel" a tax break that never was -- the loans were intended to be valuable to workers, not business owners.

https://fortune.com/2020/12/07/irs-tax-deductible-ppp-expenses-taxes-breaks-internal-revenue-service/

[TaxGuyBill]

It seems extremely clear to me, but obviously you have a different viewpoint. I'm not going to argue it.


But some members of Congress were outspoken about it too. Here is a quotation from the Chairs of the House Ways and Means Committee:

"We believe the position taken in the Notice ignores the overarching intent of the PPP, as well as the specific intent of Congress to allow deductions in the case of PPP loan recipients". . . .“Had we intended to provide neutral tax treatment for loan forgiveness,” the chairs continued, the Act’s forgiveness provision “would not have been necessary."

https://www.jdsupra.com/legalnews/th...usiness-88352/

[Rapid Robert]

If PPP was intended to be yet another tax cut for business, why was it not described as such from the outset? I notice you did not address the CBO non-partisan assessment of the budget impact of including additional tax cuts in the PPP. Shouldn't the American taxpayers have been informed from the outset that what the country needed was to put more money in the pockets of business owners even though they weren't even conducting much business, and certainly weren't creating any new jobs?

The fact that a few Congress people state "that wasn't our intent" is virtually meaningless, as they are all known liars who will say anything to cover their behinds when the going gets tough. Where is the contemporaneous written documentation that PPP was intended to be a new tax cut for business?

I mean, when would the current administration ever forego an opportunity to tout another tax cut for business, if that's what it was supposed to be?

[MichaelDi09]

Looks like Congress is debating including the PPP related expenses , as deductible expenses , so in essence , taxpayers could be receiving "tax-free" grants PLUS deductible expenses for Forgiven PPP loan.
Double dipping at its finest. People forget this is free money(if all forgiven), so paying income tax, at say 37%, on this amount , you are still ahead of the game. Of course, some businesses still haven't reopened fully and/or survived from the pandemic, so we'll see soon, what the Congress can agree on.

[Rapid Robert]

taxpayers could be receiving "tax-free" grants PLUS deductible expenses for Forgiven PPP loan.

Yup. This is what happens when the lobbyists have time to sink their fangs into the politicians, which they didn't have last time around.

So actually, the taxPAYERS will be paying taxes on the unemployment benefits and wages paid with government handouts. Meanwhile the taxTAKERS will get yet another tax cut based on the government money (taxpayer) handout they got for the benefit of their workers. See how this works now? And all the things like limiting meal deductions that were supposed to make the TCJA fall under the "budget reconciliation" rules are now being removed, as anyone who isn't in denial knew they would.

[Cooper Ohio]

I agree, why should PPP funds be treated any differently than unemployment? Since it looks like they are going to let people deduct expenses, has anyone seen anything with regard to the huge NOLs that will be created? Everyone was complaining about the bookkeeping for PPP expenses...that was nothing compared to doing NOL carrybacks.

[BOB W]

Looks like PPP funds will be forgiven with no need to offset against PPP expenses. What do we do with the PPP loan payable? Some have said that it gets applied to Basis?
What do you think?

[Cooper Ohio]

Here's the bill assuming the president signs it. https://rules.house.gov/sites/democr...RCP-116-68.pdf
Page 2004 starts the tax treatment, at first glance it looks like it gets added to the basis.

[BOB W]

Good luck in reading that bunch of gibber.