Updates

Taxation of PPP loan forgiveness

The IRS has put out guidance (Notice 2020-32) that confirms my assumption (described here) that section 265 disallows the deduction of business expenses paid with forgiven PPP loans.

That seemed like a no-brainer to me but others apparently doubted it (e.g., see here and here) and thought the forgiveness came with a tax spiff. That made zero policy sense to me for distribution of an obvious scare resource (everybody knew there wouldn’t be enough PPP loan money to go around to all eligible employers) – why wouldn’t Congress extend loans to more borrowers, rather than multiplying the benefit for the lucky few that both get PPP loans forgiven and have enough other income to generate positive tax liability now or in the future? (Okay, I can come up with two plausible, but stupid, explanations – they preferred tax expenditures to direct expenditures and/or wanted to hold down the headline cost of the PPP loan program.)

The Journal of Accountancy article linked above suggests a legal challenge may be coming. In this day and age that seems inevitable.

More on noncorporate losses

Here are some more resources and thoughts on this problematic provision of the CARES Act that I have previously blogged about (here and here):

• Clint Wallace, a law professor at the U of South Carolina, has an SSRN document (“The Troubling Case of the Unlimited Pass-Through Deduction“) on the provision with a lot of useful detail and analysis. Worth reading.
• JCT has put out a revised estimate, reducing the estimated revenue reduction (now $135 B). It is closer to being in line with JCT’s estimated revenue increase for TCJA’s original disallowance for the comparable years. Not sure what stimulated the change, but the losses in the later years go away. Looks like a change in the estimated future profits of the businesses.
• TPC (Steven Rosenthal and Aravind Boddupalli) have a blog post on the provision that is worth reading.
• I have been puzzled, as I suggested in my original post, as to why Congress included this provision in the CARES Act. It will reduce revenue by an incredible amount and has (at best) only a tenuous connection with what I assume was the policy rationale for the Act – i.e., helping people and firms adversely affected by SARS-CoV-2 and COVID-19 and in need of emergency help. If you have a bent toward conspiracy theories and cynicism about politicians (I tend not to), the natural conclusion is that it was a gift to donors. Reading Jane Mayer’s article about Mitch McConnell in the New Yorker could certainly fuel that thought. She reports that Stephen Schwarzman, the billionaire who is the head of the Blackstone Group hedge fund, has “since 2016, donated nearly thirty million dollars to campaigns and super pacs aligned with McConnell.” I assume that Schwarzman must be one of the biggest beneficiaries of the provision (possibly 9-figure tax savings).

COVID-19 MN testing data

I continue to be fixated on Minnesota’s COVID-19 testing data, especially related to data from other states. As testing ramps up, it appears that the trends I previously noticed have continued:

• With its increased testing levels, Minnesota’s case numbers now appear more average. Minnesota no longer is among the 10 states with lowest numbers of cases, adjusted for population. The state ranks 14th as of May 3. By contrast, the state’s ranking on testing continues to move up. It’s 40, rather than 42.
• What continues to trouble me is that percentage of positive tests continues to trend up with the higher testing levels. For April before the announced ramp-up in testing (i.e., through April 23rd), an average of about 1,300 tests per day were run with 7% of them being positive. However, since then (through May 4), the average daily testing rate is 3,700 but the positive rate is 12%. Put another way, while the daily testing rate has increased by 160%, the number of positives per day have increased more than twice as much. That suggests to me that the method of allocating scare testing resources must not have been well directed at testing those with the highest probability of infection – maybe because more tests were allocated to health care workers or long term care facilities? Who knows. Obviously the case numbers wildly understate the number of actual cases and I hope we start seeing a downward trend in the percentage of positives.
• Minnesota’s case fatality rate is still very high (4th highest in the nation as of May 3rd behind Michigan, Connecticut, and Louisiana but only slightly behind Indiana and New Jersey). As testing rates increase, I’m sure that will decline, but it still seems odd to me. One possible explanation (also responding to the previous bullet’s observation) is testing was allocated to those at the highest risk of dying from COVID-19, such as residents of long term care facilities? Other states are probably testing many more younger individuals who are less likely to die if they get infected, yielding Minnesota’s high CFR.
• The really striking thing about Minnesota’s experience is the long term care situation. While less than 20% of the cases are residents of those facilities, they represent 80% of the fatalities. I haven’t seen national statistics to provide a comparison, but reports about the experiences in other states (e.g., Georgia, which reported 511 deaths in LTC facilities on 5/1 out of 1,154 for 44% of deaths) suggest Minnesota is high. The death toll in LTC facilities nationally is high; Minnesota’s just seems even more so. I hope someone eventually does a national comparison and analysis of ways to minimize the effects. Minnesota facilities seem not to be doing well in that regard.
• The obvious question nationally is whether states that have loosened social distancing restrictions – e.g., Georgia and Florida – will see a big jump in cases or not. I’m sure people will be keeping a close eye on that; I know I will.