Stop the Surprise Small-Business Tax Increase

The Payroll Protection Program enacted this past spring has helped millions of employers and workers survive an economy that was in freefall from COVID-related closures. Now, with the recovery underway, those same small businesses will face a surprise $100 billion tax hike if Congress fails to act soon. 

The PPP program’s design was simple – use local banks to provide loans to smaller employers during the shutdown. If the employers used the money to keep workers employed and on other necessary expenses, their loans could be forgiven and tax-free.

The tax-free aspect of the PPP was not an afterthought, but a central element of the plan. The sponsors of the program and their supporters repeatedly emphasized this benefit during the congressional debate, and it was well understood as the law started to be implemented. Simply take out the loan, spend it on the approved expenses, and any loan forgiveness would be tax-free.  

But recent positions taken by the Treasury and the Internal Revenue Service have turned this policy on its head. By denying borrowers the ability to deduct the same expenses that qualified them for the loan forgiveness, this action produces the same result as if the loan forgiveness was repealed. This was not at all what Congress intended.

As a result, businesses across the country may soon face a surprise tax bill when they can least afford it. This is not a small problem – the PPP has lent out over $500 billion in loans to more than 5 million small businesses. This money has already been spent on wages and other necessary business expenses. Changing the rules mid-stream and forcing these same borrowers to now pay a tax on loan amounts that were supposed to be tax-free, with money they don’t have, will result in a tax bill of over $100 billion — all due next year.   

This surprise tax hike could be the final factor that causes many businesses to close. According to Yelp, 60 percent of the restaurants closed by the economic shutdown are not expected to reopen. If the shutdowns continue, we should expect to see high rates of business failures across a broad swath of industries.  With so many businesses hanging on by a thread, the last thing they need is a surprise $100 billion tax hike.  

Fortunately, Congress can fix this problem easily and without increasing the deficit. Because congressional intent is clear and confirmed by the bipartisan leaders of the tax-writing committees, restoring the proper tax treatment to these loans is considered to be a “technical correction” by the Joint Committee on Taxation and would not count as a revenue loss.  

Another reason Congress needs to confirm the deductibility of PPP loans is that some states, including California, are now considering taxing them too. That would only add insult to injury.

A new survey of Main Street business groups showed that, next to liability protection, restoring the tax deductibility of PPP loan forgiveness enjoyed the highest support. That explains why 180 trade groups recently implored Congress to restore the tax benefits it intended. These Main Street groups warn that denying the correct tax treatment of PPP loans will result in unnecessary hardship for struggling small businesses. As one business owner observed, it would be like “a kick in the gut after you had a swift pat on the back.”   

Voters understand what’s at stake, too. Recent research shows that by almost three to one, voters agree that raising taxes on small businesses right now is unacceptable. This view holds even when the tax hikes are used to fund budget shortfalls or to avoid cutting government services. 

Despite the broad support from Congress, voters and the business community, the problem remains unsolved. This is as hard to understand as a $100 billion tax hike on 5 million small businesses is sure to be unwelcome. Those businesses and the workers they employ are counting on Congress to act.  We can’t let them down.  

Chris Smith is the executive director of the Parity for the Main Street Employers coalition of national business groups and a former Treasury and congressional chief of staff.

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