Tax-free status of paycheck protection loans in question

Work still is needed to ensure that the billions that the U.S. Small Business Administration has lent to businesses via the Paycheck Protection Program are fully tax free if they qualify as forgivable loans.
While the loans have been marketed as eligible for forgiveness if at least 75% of expenses are used on payroll, Tim Matte, co-owner of Pitts & Matte certified public accounting firm in Morgan City, said there still is work to be done to insure these loans don’t essentially qualify as taxable income.
Matte, who has been in the tax business for nearly 40 years, said that the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, approved by Congress states that loans forgiven are tax free.
However, he said the Internal Revenue Service’s position is if an expense is paid with tax-free income, then it can’t be deducted.
“So the IRS’ current position is ‘Yes, that forgivable loan is tax free, but the expenses you paid with it are not deductible,’” Matte said Tuesday.
So essentially, he said, as of now, the loan is not tax free.
Tax lawyer Robert Wood wrote in a Forbes article that the IRS has said “this treatment prevents a double tax benefit.”
However, he said the double-tax benefit is what the loans are meant for.
“There could be a dispute about what Congress really meant in the hastily passed CARES Act, and the pushback from some in Congress suggests that,” Wood wrote.
He said the IRS and opponents of the deductions have made points to side with their case.
Matte said the American Institute of Certified Public Accountants has contacted Congress and the Treasury Department to remedy this issue.
“I think there’s more to come to that story, basically, how that’s going to ultimately end up being handled,” Matte said.
While tax filings slowed for his business since the federal and state deadlines have been extended from April 15 and May 15, respectively, to July 15 for all tax filings, Matte said that helping customers navigate the intricacies of the Paycheck Protection Program filled the void.
“Once the PPP passed, then kind of the focus changed of ‘well, I’ll take care of my taxes later, but let’s get this done,’ or in some cases maybe had already taken care of their taxes for ’19 and it was just a matter of going back and assisting them in pulling up the information they needed and how to apply and so forth,” Matte said.
As for stimulus checks, Matte said those are not considered taxable income.
While he has fielded many questions on the checks, he said if consumers filed their taxes and selected the paper check option instead of direct deposit, those paper checks have started being sent recently and are starting with the lower income brackets.
One thing to remember for those who collect Social Security is that the IRS is using income tax return information initially before Social Security data.
“If you don’t normally get a refund and therefore don’t have direct deposit information, then you’re getting a check, and those checks are coming later,” Matte said.
As for advice to tax filers, Matte encouraged the public to file their taxes now, even if they owe money.
“Certainly if you owed money or you think you owe money, you don’t have to pay it until July 15,” Matte said. “(That) doesn’t mean you can’t file your return, and it would be perfectly OK to file your tax return and then wait and pay the money on July 15.”