The Internal Revenue Service dismayed many HVAC contractors and other business owners shortly before Thanksgiving by reaffirming its position on tax deductions for expenses that are paid with Paycheck Protection Program (PPP) funds.
In short, if a company “reasonably expects” that its tax-free PPP loan will be forgiven, then it cannot “double dip” by also deducting expenses that it pays for with PPP money. This is true even if those expenses might have previously been tax deductible in normal circumstances, and even if the company has not submitted a PPP loan forgiveness application by the end of the year.
While new rules or rulings more commonly elicit complaints from the business sector, Revenue Ruling 2020-27 (PDF) earned poor reviews because it represented no change at all. When the Treasury first announced this position last May, it surprised many in business and government who expected its status to change before long.
As ACCA Government Relations Representative Chris Czarnecki pointed out in a November note to ACCA members, among the surprised were elected officials who wrote and voted for PPP legislation and publicly confirmed that they did not intend its use to negate existing tax deduction opportunities.
Alex Ayers, HARDI director of government affairs, described the legislation’s lack of specificity on this matter as “one of the downsides to rushing this program through Congress.”
“Congress intended the program to be tax free,” he said, “and having the IRS renege on that promise doesn’t sit well with business owners.”
Ayers acknowledged that the existing IRS language prohibiting double-dipping on tax-exempt income would be appropriate to enforce in non-pandemic circumstances. However, this scenario is not about normal tax policy, he said, and the difference should be acknowledged accordingly.
If the congressional failure to include more specific language in the original bill was out number one, then the recent IRS ruling represents the second out. However, PPP recipients are not out of luck quite yet.
“It is possible, though not necessarily likely, that Joe Biden’s Treasury and IRS take a lighter approach to the issue come 2021,” Czarnecki said.
A more likely source of late-inning relief could come in the form of a separate legislative remedy from Congress.
“There is an opportunity in the end-of-year package to make this fix, and the heads of the tax-writing committees are supportive of fixing the mistake,” HARDI’s Ayers said. “But with so many issues including additional coronavirus relief still left to solve before the end of this Congress, the fix could get pushed into next year.”
If there is any additional silver lining, Czarnecki noted, it is that bipartisan legislation along these lines has already been introduced in both the House and Senate.
Related, Czarnecki did point out IRS Revenue Procedure 2020-51, another recent clarification for PPP loan recipients.
That document “does allow taxpayers to claim deductions against their income for eligible expenses in the event that their forgiveness is denied or they decide not to apply for forgiveness.”
In that case, Czarnecki explained, the recipient or business would file an amended tax return to claim the deductions in a subsequent taxable year.
In the meantime, the National Electrical Contractors Association told its members via email that it remains committed to fighting what it called a “misguided initiative” and encouraging Capitol Hill to generate a December fix.
As HARDI and ACCA leadership outlined, even if the clock does run out on the legislative year, a solution can still develop for PPP recipients. Dragging ongoing uncertainty into 2021 is not a popular concept, though, especially when it could require more time spent later on accounting and taxes.
Either way, contractors who keep their receipts organized will be ready, if and when Washington reverses course to allow a historically rare double dip of tax avoidance.