With growing support on the Hill and a nod from the Joint Committee on Taxation (JCT), it seems more likely that Congress will move a clarification of its intent that taxpayers may write off expenses paid with forgiven PPP loans.
In Wednesday’s Wall Street Journal, Richard Rubin (one of our favorites) writes about a snafu in PPP loans that could end up costing small businesses $120 billion in taxes. The issue stems from the way Congress wrote the CARES Act, which provides PPP loans to small businesses. “The law explicitly says that forgiven loans don’t count as taxable income, but it is silent on whether ordinary tax deductions for the same expenses are allowed,†Rubin writes.
A provision that would allow deductions for PPP expenses is omitted in the Senate’s HEALS Act proposal. In April, IRS issued Notice 2020-32, which prevented PPP loan recipients from deducting some related expenses. Treasury supported IRS’s decision to deny deductions for small businesses on tax-free income.
Meanwhile, JCT announced that the clarification would not result in any revenue loss because, their original estimate had included a deduction. With that, the last Congressional holdout, Congressman Kevin Brady, the ranking member of the Committee on Ways and Means, softened his earlier opposition. While Congress remains at a deadlock on the new relief bill, and anything can happen in this fraught environment, the clarification looks for all intents and purposes to be a likely candidate for final compromise.
Otherwise, here is a summary of new (or new-ish) notable legislative, regulatory, tax administration issues, and a number of reminders from IRS this week:
- IRS July 30 issued proposed regulations for Tax Cuts and Jobs Act (TCJA) simplified tax accounting rules for small businesses. For tax years beginning in 2019 and 2020, these simplified tax accounting rules apply for taxpayers having inflation-adjusted average annual gross receipts of $26 million or less (known as the gross receipts test). (IR-2020-174)
- To provide flexibility in testing due to the COVID-19 pandemic, IRS is extending the two-year carryover period for SEE candidates to three years. Generally, candidates who pass a part of the examination can carry over a passing score up to two years after the date they passed that part of the exam. The extension applies to any examination parts that had not expired as of February 29, 2020, and any examination parts passed on June 1, 2020, or later.
- IRS issued temporary and proposed regulations, effective July 29, 2020, to reconcile advance payments of refundable employment tax credits and recapture the benefits of these credits when necessary. The regulations released on July 27 authorize the assessment and collection of any erroneous refund of the credits in the normal course of processing the applicable employment tax returns or Forms 7200. This allows the IRS to efficiently recover any refund, while preserving administrative protections for taxpayers. (IR-2020-169)
- IRS issued final regulations, July 28, 2020, regarding the provision of the Tax Cuts and Jobs Act that limits the deduction for business interest expense, including basic statutory amendments made by the CARES Act. The business interest expense deduction limitation does not apply to certain small businesses whose gross receipts are $26 million or less. The $26 million gross receipts threshold applies for the 2020 tax year and will be adjusted annually for inflation. (IR-2020-171)
- IRS is advising taxpayers of a new temporary procedure to fax automatic consent Forms 3115 due to COVID-19. Starting July 31, 2020, and until further notice, IRS will accept the duplicate copy of Form 3115, Application for Change in Accounting Method, via fax. This change applies only to taxpayers requesting consent to make a change in accounting method under the automatic change procedure. Taxpayers will still need to submit two copies of the Form 3115 to the IRS. Taxpayers must continue to file Form 3115 with their tax return (including extensions). However, instead of mailing the duplicate paper copy of Form 3115 to the IRS in Ogden, Utah, taxpayers can now fax it.
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