News : Gaming out PPP deductibility — Revamping the revenue ruling

Monday, November 23, 2020

Gaming out PPP deductibility — Revamping the revenue ruling — Biden's Cabinet picks are coming

Nov 23, 2020

With help from Aaron Lorenzo

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THE PPP SCENE: It probably shouldn't have surprised anyone that Treasury Secretary Steven Mnuchin and the IRS just doubled down on their earlier finding that companies who received forgiven loans through the Paycheck Protection Program can't write off normal business deductions paid for by those loans.

But the timing is interesting, right? President-elect Joe Biden is set to take office in less than two months, and the prevailing view among lawmakers is that Congress intended to allow the double-dipping on the PPP loans and the normal business deductions.

So is there a chance that a Biden administration could reverse Mnuchin on this? Or that Congress will throw its weight around to make it clear that businesses can have both? Let's check this out from several different perspectives.

The IRS: It might sound odd, but on some level this is a pretty easy call for the tax collector. In short: If a company gets loans that they don't have to pay back to the government, then they shouldn't also get to deduct expenses paid for with that money.

With that in mind, Philip Hackney, a former lawyer in the IRS Chief Counsel's office, said that — mechanically speaking — it wouldn't be that hard for a new administration to revamp the revenue ruling just issued by Treasury and the IRS.

That said: "My guess is from a substantive position, though, the IRS would be hard pushed to change. This is because it is a pretty straightforward position for the IRS," wrote Hackney, now a law professor at the University of Pittsburgh, in an email.

Which means that the best way for the IRS to change its mind is for Congress to give it no choice. Sen. John Cornyn (R-Texas) has sponsored a bill, S. 3612 (116), clarifying that businesses should still get normal business deductions even if they get forgiven PPP loans, along with a group of some three dozen bipartisan cosponsors.

Top tax writers have said they're working to get that clarification into any year-end vehicle they can find. But given how this lame-duck session has kicked off, it's no sure thing that an agreement like that is waiting to happen — and, so far at least, there's no real momentum behind the legislation.

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We'll take your whats, whens, wheres and whys, too.

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BACK TO PPP: Here's an industry take on how Treasury and the IRS are handling the situation — maybe now's not the time to be so by the book.

"There is no textbook for a pandemic economy with three different waves of government closure orders, capacity restrictions and a contagious virus that affects on-premise behavior," said Aaron Frazier of the National Restaurant Association.

"So when we hear that, academically, this policy may hold water, it doesn't feel like it applies to the real world situation that small businesses are facing right now."

Frazier, like other business advocates, believes that the executive branch could fall in line behind what legislative leaders say they were trying to do in March's CARES Act, H.R. 748 (116). Still, he acknowledged that the best option would be for Congress to weigh in further.

The practitioner side: The plan for lots of companies taking PPP loans was pretty simple — take your ordinary and necessary business deductions this year, and then hope that the powers that be change their mind so you can get your loan forgiven in the future.

But last week's newest statement from Treasury and the IRS seemed laser-focused on shutting down that idea. The government warned companies that think their PPP loan might be forgiven to hurry up and apply, because businesses won't be allowed the tax deductions if they "reasonably believe" the loans will be excused.

So one more idea: Would some companies take the chance that a Biden administration might reverse Mnuchin on this? Glen Birnbaum, a partner at the accounting firm Sikich based in East Peoria, Ill., said he'd advise against that path.

Birnbaum noted that he'll be explaining to clients that a revenue ruling is "pretty high up on the food chain," and doubted many taxpayers or preparers will want to risk running afoul of it. "I think it will cause more to file for an extension in the hopes that this will get cleared up via Congress," he added.

THE WEEK AHEAD: Ron Klain, the incoming White House chief of staff, said on ABC's "This Week" that Biden would start announcing Cabinet picks on Tuesday. The president-elect has already said that he's decided on his Treasury secretary, so stay tuned come tomorrow. (Janet Yellen? Lael Brainard?)

Which leads into: The status of IRS Commissioner Chuck Rettig. To be clear, neither Biden nor his team have left any indication that they're unhappy with the commissioner, whose term runs deep into 2022, even though there is plenty of frustration among progressives over how Rettig has handled Democrats' request for President Donald Trump's tax returns.

At a Friday hearing with Rettig, Rep. Bill Pascrell (D-N.J.), the chairman of the House Ways and Means oversight subcommittee, kind of just let it drop that this could be the IRS chief's last hearing in that role, before adding that he wasn't trying to suggest anything.

But others are certainly trying to suggest something: The Revolving Door Project, in a memo they're sending around today, put both Rettig and Mike Desmond, the IRS chief counsel, on a list of officials chosen by Trump that Biden should fire immediately. (The rationale: "No political appointee in the Trump administration can be reasonably assumed to put country over party.")

One thing to remember: It's been pretty common for presidents to dawdle on nominating new IRS commissioners, and for the Senate to take its time on confirming them — which means it's also been typical for past commissioners to finish their five-year terms and then be succeeded for months at a time by a deputy who isn't a political appointee, while the administration and Congress work to get a nominated replacement in place. Jeff Hauser of the Revolving Door Project said that's one reason to think that getting rid of Rettig or Desmond wouldn't be that disruptive.

Around the World

HOW IS EVERYONE ELSE RESPONDING: Here's Weekly Tax's latest whiparound of how other countries are dealing with their coronavirus relief.

Saudi Arabia: The Gulf state won't be turning back from its decision to triple its value-added tax, from 5 percent to 15 percent, anytime soon, Reuters reports. Finance Minister Mohammed al-Jadaanh said during this weekend's virtual G-20 conference that the VAT rate might be reconsidered over the long haul.

The U.K.: Rishi Sunak, the chancellor of the exchequer, said there will be no austerity in a new fiscal plan due Wednesday, also from Reuters. There will be a time for spending cuts and tax hikes, Sunak said, but not yet. "Once we get through this crisis we need to think more about returning to a more normal path," he said:

Czech Republic: Prime Minister Andrej Babiš has won approval of his plan to cut taxes for individuals, as Bloomberg reports, which will broaden the stimulus offered beyond subsidizing small businesses and the pay of furloughed workers.

The Philippines: The government there is now offering tax breaks to companies making medical equipment and medicine, as well as face masks, also from Bloomberg.

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Around the Nation

LET'S DO IT AT THE PUMP: Louisiana officials haven't warmed to the idea of a gas tax hike recently, but a new coalition is hoping another nudge will get the necessary support, The Shreveport Times reports. The group of contractors and other organizations is hoping for a $300 million gas tax hike. But back in 2017, a gas tax proposal didn't even get a vote in the state House or Senate because of the level of opposition. Louisiana drivers currently pay 38.4 cents per gallon in gas taxes, which the new proposal would eventually get to around 60 cents over more than a decade. (As it stands, Louisiana ranks 43rd in the U.S. for gas tax levels, according to the Tax Foundation.) Another hurdle for those pushing the gas tax hike: It requires two-thirds approval in both houses.

Quick Links

NYT: "Trump Tax Write-Offs Are Ensnared in 2 New York Fraud Investigations."

Biden is increasingly making himself a factor in the coronavirus relief talks.

More Rettig: IRS chief says next year's filing season should start on time.

Did You Know?

The PPPL, New Jersey's Princeton Plasma Physics Laboratory, is an Energy Department lab for nuclear fusion science.

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