Small business owners who borrowed operating money under the Paycheck Protection Program this year could face unexpected and substantial tax bills.

“This will close the doors of all restaurants that have taken out the loan,” said a restaurant owner from Riverhead, who requested anonymity.

“It was supposed to be a tax-free loan that got canceled. If I have to turn around and get a tax bill… ”he said. “I have already lost everything I owned and everything I have ever done,” he said. “It’s just devastating.”

The PPP loans were intended to help businesses weather the economic storm caused by the coronavirus pandemic by providing money for payroll, rent and utilities. Under the Coronavirus Relief Act that created the PPP, funds were tax-exempt and loans would be forgivable if used as intended by law.

But the IRS, in a tax decision Last month, authorized business expenses paid with the proceeds of the PPP loan are not deductible as business expenses. In other words, although the PPP loan proceeds are not taxable, business expenses paid with the loan proceeds cannot be deducted from the gross income. The bottom line is higher taxable income.

The move comes at a time when businesses face further restrictions and possible closures in response to the recent wave of viruses.

“This will put the last nail in the coffin for most people,” said Robert Gerety, vice president of the Suffolk Taverns and Restaurants Association. “It’s going to kill us all and it’s going to kill us for good.”

Gerety said around 30% to 40% of bars and restaurants in Suffolk have already closed permanently. He was unaware of the IRS decision when contacted by RiverheadLOCAL and he was stunned.

“They never told us at first,” Gerety said.

Riverhead Chamber of Commerce chairman Robert Kern was also surprised by the decision.

If the only business expenses allowed under the P3 cannot be deducted from gross income, Kern said, “it’s like drowning an anchor.”

Kern said the chambers of commerce “will do everything possible to stop this kind of stupidity. It’s dangerous.”

On December 3, the United States Chamber of Commerce and hundreds of trade groups across the country sent a letter to management of the United States House of Representatives and the United States Senate demanding that Congress enact legislation before the end of the year to address “the tax treatment of loan cancellation under the loan protection program. pay checks ”.

Without congressional action, business leaders wrote, millions of small businesses will face a startling and, in many cases, insurmountable tax bill next year.

The effect of last month’s IRS decision is to “turn the tax-exempt loan exemption into taxable income, raising the specter of a surprise tax increase of up to 37% on small businesses when they file their taxes for 2020 “.

The bipartisan leadership of the House Ways and Means Committee and the Senate Finance Committee have released public statements saying the IRS decision runs counter to Congress intent for the PPP, which was part of the CARES law.

“Since the CARES Act, we have emphasized that our intention was that small businesses receiving loans from the Paycheck Protection Program receive their deductions for ordinary and necessary business expenses,” Chairman of the Finance Committee of the Senate, Chuck Grassley (R-Iowa) and Ranking Member Ron Wyden (D-Ore.) Said in a joint declaration last month.

“We have explicitly included language in the CARES Act to ensure that recipients of PPP loans whose loans are canceled are not required to treat the loan proceeds as taxable income,” the senators said. The Treasury Department’s approach, “effectively makes this provision meaningless.”

The move comes at a time “when many businesses continue to struggle and some are starting to shut down again. Small businesses need help maintaining their cash flow, not more pressure on it, ”Grassley and Wyden said.

Local businesses that haven’t bounced back from the first wave of coronavirus this spring can’t handle a 30% tax liability, accountant Ron Farnworth, of Kandell, Farnworth and Pubins CPA told Aquebogue.

“Companies that are still struggling do not have the cash flow to pay tax owing and they will face interest and penalties on those assessments,” Farnworth said.