Block a Surprise Federal Tax Increase of Up To 37 Percent on PPP Loan Forgiveness

Tell Congress and the President to enact legislation this year to protect construction jobs by blocking a surprise federal tax increase of up to 37 percent on Paycheck Protection Program (PPP) loan forgiveness.

If Congress fails to act by the end of the year, thousands of construction jobs funded through PPP loans could be in jeopardy because, rather than 100 percent of PPP funds going to payroll, rent, utility payments, and mortgage interest, up to 37 percent will go to the IRS instead.

Enacted in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the PPP is one of the most impactful pandemic relief measures utilized by tens of thousands of construction firms to retain their employees amid the greatest economic disruption of our lifetimes. The terms of the PPP were supposed to be simple: if a qualifying small business takes out a federally guaranteed loan to pay its employees and cover other non-payroll expenses, the loan will be forgiven, tax-free.   

While Congressional tax writers made clear that they intended for PPP loan forgiveness to be completely tax-free, the IRS disagreed.  On April 30, in IRS Notice 2020-32, the agency decided that expenses associated with PPP loan forgiveness were not tax deductible. Then, on November 18, the IRS issued Revenue Ruling 2020-27. In that ruling, the IRS declared that expenses funded through a PPP loan are not deductible for this tax year if “the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.”

The effect of these IRS rulings are to transform tax-free loan forgiveness into taxable income, regardless of whether a business has applied for PPP loan forgiveness this year, raising the specter of a surprise tax increase of up to 37 percent (or higher, once state income taxes are included) on small businesses at the end of the year.   

AGC urges support for legislation in the Senate (S.3612 sponsored by Sen. Cornyn (R-Texas)) and in the House of Representatives (H.R. 6821 sponsored by Rep. Holding (R-N.C.) and H.R. 6754 sponsored by Rep. Fletcher (D-Texas)) that would overturn the IRS’s position and ensure that PPP loan recipients are provided the full benefits intended in the CARES Act. AGC is asking Congress to not delay in enacting this legislation, and to pass it before the end of the year.

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