income tax

PPP loan tax update

New details on who got PPP loan money were published after I posted yesterday (12/1). I couldn’t resist posting again (apologies to my 2 readers) because I think the data strongly make my point that reversing the IRS would put cash in the wrong pockets.

A day after my most recent post on taxing PPP loan forgiveness, new data became available on who received PPP loans thanks to a federal court order in a FOIA lawsuit filed by WaPo. See these NYTimes (“P.P.P. Loan Data Shows How a Sliver of Borrowers Got Much of the Help”) and WaPo (“More than half of emergency small-business funds went to larger businesses, new data shows“) stories for details. I couldn’t resist posting the links and describing the information, since I think the data underlines why reversing the IRS position is a dumb idea.

According to the stories, a few firms got a lot of the money – 1% of recipients received 25% of the money and 5% got 50%. About 600 businesses received the maximum loan amount ($10 million each or $6 billion in total). These are obviously not small businesses by most standards. Many of them were national restaurant chains (e.g., P.F. Chang and Legal Sea Foods are listed in both stories) that the law treats as small businesses, along with hotels, under special rules the industries convinced Congress to include. The NYT story also reports that a couple of recognizable national law firms – Boies Schiller Flexner and Kasowitz Benson Torres – each got $10 million PPP loans. Marc Kasowitz, of course, was Trump’s lawyer for much of the Mueller investigation and David Boies is a big Democratic lawyer, representing Al Gore in the 2000 election dispute that went to the Supreme Court. [A Minnesota aside: Other sources report that Robins Kaplan, a big Minneapolis law firm, also got the maximum $10 million PPP loan. I’m glad that Faegre and Dorsey had the apparent good sense to pass on bellying up to the PPP trough.]

It is safe to say that both of the law firms likely have positive income for the relevant years. The pandemic is unlike to have hit them hard enough (if much at all) to cause them to lose money. Allowing them to deduct the expenses financed with the PPP loans will be the cherry on top of their PPP sundae. These firms are undoubtedly taxed as pass through entities, since almost all law firms are. Thus, any tax savings will go right into to their partners’ or shareholders’ pockets. Prestige NYC and DC law firms compensate their partners quite well with many of them making seven figure amounts. (See this Bloomberg law story for some detail: “Top partners at major law firms can earn between $3 million to $10 million, according to compensation experts[.]”) Assuming their partners’ average marginal federal income tax rate is 30% (probably a conservative estimate), reversing the IRS position would yield a cool $3 million in tax savings ($10 m loan proceeds * 30% tax rate = $3 m) for each firm.

By contrast, the pandemic has hit the restaurant and hotel industries hard, including chain restaurants. But I would guess that many of the national restaurant and hotel chains have not been able to get refunds of all the relevant prior years’ taxes with NOL carrybacks generated by their current year operating losses. Thus, deducting the expenses paid with PPP loans, while excluding loan forgiveness, will yield them a tax refund that will go into their corporate coffers.

In any case, this all goes to help explain why there is a powerful constituency for reversing the IRS decision.  But I think it also reinforces why doing so is such a bad idea – giving money to P.F. Chang, David Boies, or Marc Kasowitz is not a good use of scare coronavirus relief money. I have some sympathy for the restaurant and hotel chains, but a far better use of the money would be to pay extended or higher unemployment benefits to their cooks, wait staff, cleaners, desk staff, and other employees that they have undoubtedly laid off, many of whom will be exhausting their benefits soon.

I have not seen details on what the bi-partisan bill (still opposed by McConnell, of course) includes but I hope they had the good sense not to include the PPP tax spiff, despite Grassley’s and Wyden’s support for it.

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