By way of this letter I ask that you act swiftly to correct the position of the Internal Revenue Service (“IRS”) announced on November 18, 2020 in Revenue Ruling 2020-27 which, if allowed to stand, will result in a significant, unexpected tax liability for [Connecticut/your state] businesses in contravention of Congress’s intent when it passed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, P.L. 116-136.
Section 1106(b) of the CARES Act provides, generally, that an eligible recipient of a PPP loan can receive forgiveness of indebtedness on the loan in an amount equal to the sum of payments made for the following expenses during the covered period: (1) payroll costs; (2) interest on any covered mortgage obligations; (3) covered rent obligations; and (4) covered utility expenses.
Normally forgiveness of indebtedness is included in gross income under Code Section 108. However, Section 1106(i) of the Cares Act provides:
“(i) Taxability. --- For purposes of the Internal Revenue Code of 1986, any amount which (but for this subsection) would be includible in gross income of the eligible recipient by reason of forgiveness described in subsection (b) shall be excluded from gross income.”
Thus, any amount forgiven under the PPP is intended to be excluded from gross income. Revenue Ruling 2020-27 denies income tax deductions for the payment of the ordinary and necessary business expenses listed above. Denying an income tax deduction for these expenses yields the same tax and economic result as if the forgiveness of the PPP loan were treated as cancellation of indebtedness income and the borrower deducted these expenses. If this was the intended result, there would have been no reason to include Section 1106(i) in the CARES Act.
When the U.S. Treasury Department issued Rev. Rul. 2020-27 on November 18, 2020, its press release asserted that this “results in neither a tax benefit nor tax harm.” This is not the case. The impact on businesses will be significant and detrimental. For example, for a Connecticut business taxed at a combined tax rate of 27.5%, Rev. Rul. 2020-27 results in additional tax liability of $275,000 per $1,000,000 of PPP loan.
We believe the IRS position in Rev. Rul. 2020-27 is flawed and could ultimately be overruled by the courts. However, there will be immediate negative financial consequences if taxpayers must file 2020 tax returns following this ruling. Congress can and should preempt these consequences by passing legislation that will reverse Rev. Rul. 2020-27.
We ask that you support such legislation.