Paul L. Caron

Tuesday, March 30, 2021

Grewal Presents Allocating Deductions To Tax-Exempt Income Virtually Today At Florida State

Andy Grewal (Iowa) presents Tax 202: Properly Allocating Deductions to Tax-Exempt Income virtually at Florida State today as part of its Tax Workshop Speaker Series hosted by Jeffrey Kahn: 

2020_Grewal_Andy_Faculty (3)Through the CARES Act, Congress established a generous Paycheck Protection Program. Under that program, recipients would get loans which could easily qualify for tax-free forgiveness. As an added bonus, taxpayers would enjoy tax deductions when they spent the amounts they borrowed.

Or so it seemed. After the IRS issued a notice denying deductions PPP expenses, Secretary Treasury Steven Mnuchin personally reviewed the matter and decided that the IRS’s position followed from “Tax 101.” Congress eventually stepped in and offered a narrow statutory clarification: PPP expenses would be deductible.

Unfortunately, Congress did not go far enough. The IRS, with the blessing of some courts, has long used an aggressive interpretation of Section 265(a) to improperly allocate deductions to tax-exempt income, and thereby deny them.

This Article explains the conceptual problems with the IRS’s approach and argues that it should be abandoned. The Article also urges Congress to legislate more broadly and offers different alternatives to address any improper double tax benefits.

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