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The IRS issued guidance late Thursday preventing business owners who have their PPP loans forgiven from claiming tax breaks on otherwise deductible expenses if they were paid for using the government aid.
The loans are tax-exempt, so the guidance was based on existing law, which generally aims to prevent people from receiving a “double tax benefit.”
However, the ruling has upset both lawmakers and taxpayers, who say it is not what Congress intended when it created the program.
“If the [expenses] are not deductible, then in effect they’re paying tax on this loan, which makes it worth less,” Ed Slott, founder of IRAhelp.com, told FOX Business. “Losing a deduction is the same as being taxed on something.”
Slott said he believes PPP loan money wasn’t intended to be treated like normal tax-exempt income under the law, which is how the IRS has formulated its guidance.
On the other hand, Howard Dvorkin, chairman of Debt.com, told FOX Business the IRS is right to disallow “double dipping.”
“If you’re getting free money, you shouldn’t get the tax deduction for that,” Dvorkin said. “The taxpayers in the end are paying for this.”
Congress has the power to override the IRS’ guidance – and early indications are that it may choose to do so.
Sen. Chuck Grassley, a Republican from Iowa who is the Senate Finance Committee chairman, disagreed with the IRS’ decision on Thursday, saying the issue was discussed when PPP was being developed.
“The intent was to maximize small businesses’ ability to maintain liquidity, retain their employees and recover from this health crisis as quickly as possible,” Grassley said in a statement. "This notice is contrary to that intent."
A spokesperson for Rep. Richard Neal, A Massachusetts Democrat who is the chairman of the House Ways and Means Committee, told Bloomberg that lawmakers planned to address the policy in the next round of response legislation.
Either way, both Dvorkin and Slott acknowledged that business owners are lucky to have received loans from the government, especially given their high-quality and low interest rates.
Many experts have noted that frequent changes to the program’s terms have become confusing, and basing decisions off of guidance as it stands now may not be the best course of action if that guidance changes down the road.
The program, designed to incentivize companies to retain their staff, has been the cause of frustration for some. Millions of business owners are still waiting for banks to process their loans after an initial round of $350 billion worth of funding ran out last month. Lawmakers and financial experts believe the second $310 billion will also run out before all eligible businesses receive a loan.