Late last year, a thorn emerged in the side of the historically successful Paycheck Protection Program (PPP), which provided $525 billion in forgivable loans to more than 5 million American small businesses hurt by the pandemic. Suddenly, business owners feared facing a tax consequence for the aid they received.
Though the PPP funds themselves were nontaxable, the IRS was attempting to tax the use of the funds on business expenses that cannot be deducted from tax returns. A coalition of small businesses and trade associations promptly wrote Congress to explain that the tax burden the IRS was attempting to levy against American small businesses would make it cheaper for some businesses to fire employees and repay their PPP loans than face the tax consequences.
Additionally, the coalition argued the roughly $120 billion in PPP taxes that the IRS was attempting to collect would be far better served circulating on Main Street, generating revenue and helping along the American economic recovery.
In December, Congress yielded to the calls of small businesses and added a provision in the second stimulus package that provides a tax break on PPP funds for small business owners. But now, some states are re-introducing the issue, opting not to conform to the federal tax code guidelines and instead moving to unexpectedly tax PPP recipients.