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ADA urges IRS to make PPP expenses deductible

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Jennifer Garvin of the ADA reports that the American Dental Association is formally asking the Internal Revenue Service to reverse its guidance making Paycheck Protection Program loan expenses taxable.

In comments filed Dec. 15 in response to the agency’s proposed rule, IRS Review of Regulatory and Other Relief to Support Economic Recovery, ADA President Daniel J. Klemmedson, D.D.S., M.D., and Executive Director Kathleen T. O’Loughlin, D.M.D., called the PPP “one of the most effective economic relief measures” for the Association’s small business dentist members during the pandemic.

The Paycheck Protection Program is a loan established by the Coronavirus Aid, Relief, and Economic Security Act to provide a direct incentive for small businesses to keep or rehire their workers.

Drs. Klemmedson and O’Loughlin noted that the terms of the PPP were simple: if qualifying dental practices used a federally-guaranteed loan to pay their employees and cover certain non-payroll expenses, the loan would be forgiven. From April to August, millions of businesses received PPP loans, preserving “tens of millions of paychecks” as the pandemic spread throughout the country, according to the Small Business Administration. The ADA letter also pointed to a provision in the CARES Act that stated any portion of a PPP loan that qualified for loan forgiveness “shall be excluded from gross income for tax purposes.”

“This tax-free treatment of any forgiven loan amount was a key provision in the law and featured prominently in the debate leading up to and following the legislation’s enactment,” Drs. Klemmedson and O’Loughlin wrote.

However, despite what the ADA said it believes was the CARES Act’s clear intent, the IRS issued guidance stating that “no deduction is allowed under the Internal Revenue Code…if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the [CARES Act].”

“The effect of this ruling is to transform tax-free loan forgiveness into taxable income, raising the specter of a surprise tax increase of up to 37 percent on small businesses when they file their taxes for 2020,” Drs. Klemmedson and O’Loughlin said.

The IRS has also issued additional guidance stating that expenses funded through a PPP loan are not deductible for 2020 if “the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.”

“This additional IRS guidance will result in a significant tax increase on small business owners who are already suffering from the effects of COVID-19 shutdowns,” Drs. Klemmedson and O’Loughlin wrote. “This tax will hit small business owners after their PPP loan has already been spent, and as many states are re-imposing mandatory closures of thousands of businesses in the face of spiking numbers of COVID-19 cases.”

The ADA letter also said that many PPP loan recipients retained employees on their payrolls, “even when there was little to no work to perform, in compliance with the intent of the program to keep people employed and off the unemployment rolls.”

“The IRS changed the rules after businesses took out PPP loans, and business owners are now being asked to pay what amounts to a surtax on their workforce,” Drs. Klemmedson and O’Loughlin concluded. “Without IRS reversal, businesses will face an unexpected tax bill when they file their taxes for 2020, as they continue to struggle with government mandated shutdowns or slowdowns. Many of those businesses will close and never reopen. This senseless tax policy runs contrary to Congress’ PPP intent and could undermine the nation’s oral health by putting dental practices in jeopardy. We ask you to please reverse your rulings.”

The Association has previously advocated for Congress to reverse this guidance and sent a letter to lawmakers in May urging them to ensure the loan forgiveness provided under the Paycheck Protection Program is not treated as taxable income. The ADA has also signed onto several coalition letters and joined forces with other dental organizations to advocate for this issue.

For more information about all of the ADA’s advocacy efforts during COVID-19, visit ADA.org/COVID19Advocacy.
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