The program, created as part of the federal coronavirus assistance bill, provided loans to small businesses to cover salary expenses in an effort to keep workers in their jobs and help them cover others. business expenses, such as rent or utilities. Generally, if these small businesses were able to keep their workers employed and maintain wage levels, the federal government would cancel the loan.

But in mid-November, the US Treasury Department and the IRS noted if a business paid expenses with money from a P3 loan that was or will be canceled, businesses cannot deduct those expenses from their taxes – deductions that would otherwise be common in previous years.

Without being able to deduct these expenses, many small businesses will face a higher tax bill, a reality Republicans and Congressional Democrats say is not what lawmakers intended when they created the program.

A “gotcha”, a “kick in the teeth” for companies

Depending on the size of a company’s PPP loan and the structure of the business, accountants have said the decision could cost small businesses thousands, tens of thousands, and even hundreds of thousands of dollars in some cases. This is despite the fact that most of the companies that participated in the program did not know they would be affected by the increased costs when they signed up.

“This problem was not visible to business owners when they applied for and received their PPP loans,” said Terry Hoover, partner at Wipfli, an international accounting and consulting firm with offices in Appleton. “It really is a bit of a ‘trap’ case for companies that have accepted the loan on the basis of an understanding of the tax result and are now presented on a very different basis.”

Jon Neal, chartered accountant and founder of Milwaukee-area accounting firm The Neal Group, said it was a “kick in the teeth” for business.

“Some restaurants have seen, like, an 80% drop in their income,” Neal said. “And now to tell them that they are going to have to pay taxes on the $ 100,000 P3 is just not correct.”

Hoover noted that this does not apply to self-employed without employees who have taken out PPP loans. These businesses will still be allowed to deduct their expenses as they normally would.

Lawmakers, business groups push back

In one joint statement On November 19, U.S. Senator Chuck Grassley, R-Iowa, chairman of the Senate Finance Committee, and senior committee member Ron Wyden, D-Oregon, urged the Treasury Department to reconsider the decision, claiming that the department as well as the IRS was ignoring Congress’ intention.

“Since the CARES Act, we have emphasized that our intention was that small businesses receiving Paycheck Protection Program loans receive their deductions for ordinary and necessary business expenses,” Grassley and Wyden wrote. Unfortunately, the Treasury has now doubled its stance on new guidelines that increase the tax burden on small businesses by making them more taxable, all at a time when many businesses continue to struggle and some are starting to shut down again. small businesses need help maintaining their cash flow, not more pressure on it. “

On December 3, hundreds of business groups like Associated General Contractors of America and the National Beer Wholesalers Association sent a letter to the leadership of Congress urging them to pass legislation before the end of the year to correct what they called “a preventable disaster for millions of small businesses.”

“The effect of this (IRS) ruling is to turn the tax-exempt loan exemption into taxable income, raising the specter of a surprise tax increase of up to 37% on small businesses when they are filing their taxes for 2020, “the letter said.

Signatories to the letter also included the Wisconsin Grocers Association, the Associated Builders and Contractors of Wisconsin Inc., and the Wisconsin Restaurant Association.

The problem is yet another challenge stemming from a program to help businesses affected by the sweep of stay-at-home orders at the start of the pandemic, in addition to businesses suffering after losing customers who simply chose to stay. at home for fear of catching or spreading COVID. -19.

Many businesses initially struggled to understand the regulatory requirements they had to follow to get loans canceled. The program has also been criticized for primarily helping businesses with pre-existing banking relationships, leaving out many businesses owned by people of color.

As of August, when the program ended, nearly 90,000 PPP loans had been made to Wisconsin companies, according to data provided by the US Small Business Administration, which administered the program. These loans have totaled more than $ 9.9 billion in assistance to businesses statewide.

For business owners who are affected by the IRS decision, Neal recommended speaking to an advisor who is familiar with the program and its requirements. Beyond that, Neal said business owners can write to their congressman or senator and “pray that this is fixed.”

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