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PPP borrowers get the tax break the IRS tried to cancel

December 23, 2020, 7:57 PM UTC

To the relief of millions of small-business owners, the new stimulus package includes a PPP (Paycheck Protection Program) tax break that Congress meant to include in the CARES Act but didn’t. Legislators of both parties love it. Treasury Secretary Steven Mnuchin doesn’t like it at all.

A coalition of some 500 national, regional, and state trade associations had urged Congress to include the tax break in the new bill in order to “prevent an avoidable catastrophe for millions of small businesses.” Without the fix, many of the 5 million PPP loan recipients would have faced a nasty surprise when they did their taxes next year. 

For their loans to be forgiven, they had to spend the PPP money on payroll, mortgage interest, rent, and utilities—expenses that account for the vast majority of costs to keep a small business open. When any loan is forgiven, the IRS normally regards it as taxable income, but the CARES Act specified that would not be the case with PPP loans. Congress forgot to address another key issue, however: Would those operating expenses—the ones that small businesses had to pay in order for their loans to be forgiven—be tax-deductible as usual?

Many business owners assumed so. A little-noticed IRS statement in May, issued after many business owners had borrowed the money, said otherwise. Result: Small-business owners would discover that their taxes for the worst year they may have ever experienced would be much higher than they expected. Now the new stimulus package will spare them that pain, assuming President Trump signs it into law.

So why did Mnuchin oppose the fix? Because it enables loan recipients to “double dip,” he has said, and he’s correct. If a small-business owner receives, say, $100,000 of free money that is spent on deductible expenses, and then is allowed to deduct those expenses without having to report the $100,000 of income, it is indeed double dipping. That’s why even some progressive groups, including Americans for Tax Fairness, also opposed the new deductibility rule, which they argue will benefit some wealthy business owners who don’t need the help.

Nonetheless, the new deductibility rule is one of those rare ideas on which both parties broadly agree, supported by conservative Republican Sen. John Cornyn of Texas, liberal Democrat Sen. Ron Wyden of Oregon, and most of those in between. They understand that the rule is a gift to small business. And in light of the pandemic’s crushing economic damage—and the political heft of small business in every state and congressional district—that’s just fine with them.