Congress, Treasury tussle over IRS guidance on $2.2T COVID-19 package

Lawmakers and the Treasury Department are tussling over IRS guidance implementing provisions of the $2.2 trillion coronavirus relief package.

Key lawmakers on both sides of the aisle this week pressed Treasury to reconsider two pieces of tax guidance implementing portions of the law, arguing that the guidance is not in line with congressional intent. Treasury on Thursday said that it would revise one of those items.

The back-and-forth comes as Treasury is rapidly working get out guidance on various aspects of the law, known as the CARES Act, after the measure was quickly considered by Congress and signed into law by President Trump.

Three of Congress’s top tax writers on Tuesday sent a letter to Treasury urging the department to revisit guidance the IRS issued last week stating that expenses associated with forgiveness of small-business loans under the Paycheck Protection Program (PPP) are not tax deductible.

“We urge you to reconsider this determination in light of congressional intent and the importance of maximizing liquidity for businesses receiving PPP loans to survive and recover from the ongoing health crisis,” wrote Senate Finance Committee Chairman Chuck Grassley (R-Iowa), Senate Finance Committee ranking member Ron Wyden (D-Ore.) and House Ways and Means Committee Chairman Richard Neal (D-Mass.).

Under the PPP, small businesses are receiving loans that are forgivable if the businesses retain their workers. 

Typically, loan forgiveness is counted as taxable income and businesses can deduct ordinary and necessary business expenses, such as wages. Lawmakers included a provision in the CARES Act that states that loan forgiveness under the PPP isn’t taxable, which had raised questions for tax preparers about how expenses associated with the loans, such as wages, would be treated.

The IRS said in its guidance that deductions aren’t allowed for expenses if the payment of those costs results in PPP loan forgiveness. The IRS cited a section of the tax code that states that deductions aren’t allowed for expenses allocated to certain types of tax-exempt income. 

But Grassley, Wyden and Neal said that while the CARES Act was being written, lawmakers had expressed to Treasury that they did not intend to deny deductions for ordinary and necessary business expenses. 

They said that if they had intended for the loan forgiveness to be tax-neutral, they wouldn’t have included the provision that makes the forgiveness tax-exempt and that the IRS guidance effectively renders that section meaningless. They also argued that the IRS interpretation of the tax code section in denying the deductions was flawed.

Frederick Vaughan, an official in Treasury’s legislative affairs office, said in a brief reply to Grassley, Wyden and Neal on Thursday that the department is taking their views under consideration and will follow up with their offices. 

Earlier in the week, Treasury Secretary Steven Mnuchin defended the guidance in an interview on Fox Business Network.

“The money coming in the PPP is not taxable. So if the money that’s coming is not taxable, you can’t double dip,” Mnuchin said. 

Some tax experts say the IRS correctly interpreted tax law in its guidance.

“I think Mnuchin is right,” said Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, which is led by a former Obama administration Treasury official.

Rosenthal said that he thinks it’s “pretty straightforward that reimbursed expenses are not tax deductible,” especially when the reimbursement is tax free.

Tony Nitti, a partner at the accounting firm RubinBrown, said that the IRS guidance is “the right answer according to the tax law.” The question is whether the guidance was what Congress intended and whether the IRS is willing to make a concession in this case, he added.

While lawmakers are pushing for their concerns to be resolved administratively, they are also pursuing a legislative fix.

Grassley, Wyden, Sen. John Cornyn (R-Texas) and other senators have introduced legislation, backed by the American Institute of CPAs, that would clarify that businesses can deduct expenses paid with forgiven PPP loans. Legislation on this topic is also expected to be introduced in the House on Friday by Rep. Lizzie Fletcher (D-Texas).

“We still need to fix the issue of deducting business expenses related to the application for PPP loans,” Grassley said in a statement Thursday. “It’s fully my intention for that issue to get resolved quickly, whether administratively or legislatively, so small businesses maintain as much liquidity as possible during this difficult period.”

The guidance on PPP loans isn’t the only area where lawmakers have recently expressed concerns about IRS interpretations of the CARES Act. 

One day prior to sending the letter about the PPP guidance, Grassley, Wyden and Neal sent a letter to Treasury expressing concerns with a portion of an IRS frequently asked questions on the CARES Act’s employee retention credit. Treasury on Thursday announced that they would make changes to this guidance. 

Eligible businesses affected by the coronavirus pandemic can receive a payroll tax credit of up to $5,000 per employee for wages and health-care expenses allocable to those wages. 

The IRS had said in FAQs posted on its website last week that if a business furloughs workers and pays the workers health benefits but not wages, the company’s health-plan expenses don’t count as qualified wages eligible for the credit.

Grassley, Wyden and Neal urged Treasury to reconsider that determination, saying it goes against congressional intent and that allowing people to keep their employer-sponsored health plans even while furloughed is important in ensuring that Americans have access to affordable health care during the pandemic.

“In drafting the provision, qualified wages were explicitly expanded to incorporate certain qualified health benefits, with the intent to provide an incentive for employers to continue providing health benefits to their employees, even if the employer was otherwise unable to continue paying regular wages because of the coronavirus pandemic,” the lawmakers wrote.

The U.S. Chamber of Commerce had previously sent a similar letter to Treasury about this issue, with the group’s vice president of tax policy, Caroline Harris, writing that “punishing employers who have continued to provide furloughed employees health care benefits during a global pandemic is simply poor public policy.”

Vaughan, the Treasury legislative affairs official, told Grassley, Wyden and Neal on Thursday that the department “will be revising the applicable guidance.”

“This is good news for small businesses and workers across the country,” Grassley said. “This decision will encourage employers to help employees keep their health insurance while temporarily furloughed due to the shutdown. The decision also aligns Treasury’s policy with the original congressional intent behind the employee retention tax credit.” 

The recent letters to Treasury aren’t the first time that lawmakers have taken issue with guidance on tax provisions of the CARES Act. For example, shortly after the law was enacted, the IRS released guidance saying that Social Security recipients would need to file tax returns in order to receive their coronavirus relief payments. The IRS subsequently reversed course, after concerns were raised by lawmakers.

Garrett Watson, a senior policy analyst at the right-leaning Tax Foundation, said that a trend with the conflicts is that lawmakers want the CARES Act to be carried out in a way that is taxpayer-friendly, while Treasury and the IRS have, at least initially, taken stricter interpretations of the statute.

“Congressional lawmakers intended to be more generous,” while Treasury is being more cautious, Watson said.