Baltimore video- and media-production agency Storyfarm did everything it was supposed to with its Paycheck Protection Program loan.

The company took the $232,000 it received in early April and spent the entire amount on payroll, keeping its 14 full-time employees as the company shifted from in-person and live-video shoots to more animation projects, said CEO John Sherman. The firm made that shift as live events and gatherings were shut down for months and local governments enacted social distancing measures.

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But Sherman is now worried about having to pay taxes on payroll expenses he normally deducts, given that the PPP loans are subject to taxes. That, he said, could work out to a $75,000 tax bill in April 2021 just as he hopes his industry emerges from the grips of Covid-19. And now, he and other small businesses are hoping that Congress will step in and fix that predicament.

“I think we were ideally suited for this [PPP] program. But if we have to pay a 30% to 40% hit on our taxes back at the end of the year — nobody planned for that,” Sherman said. As for members of Congress, “I assume they are going to have to fix it. There is no way that the businesses that survive Covid are going to crushed with this tax bill in April 2021.”

The issue stems from what experts believe was an oversight in the rushed nature of the CARES Act, signed in a matter of days in late March. The legislation first authorized the Small Business Administration’s PPP, which what ultimately became $520 billion in loans approved for more than 5 million small businesses as of earlier this month.

The legislation specified that the loans — which were designed to be forgiven if spent on specific expenses such as payroll and rent — would not be taxed when forgiven. But it failed to specify whether the expenses paid for with those forgiven dollars would remain deductible.

The IRS weighed in with an April 30 notice — after upward of 3.87 million small businesses had already taken out PPP loans, per SBA data — that it intended to interpret the CARES Act provisions in light of what experts say is established policy on untaxed funds: that businesses cannot deduct expenses with money that is also not taxed. Congress has yet to pass legislation to address that issue, and talks for further stimulus packages and broader PPP changes have stalled.

Several lawmakers asked to change what they called the “flawed interpretation” of the CARES Act, according to a May 5 letter to Treasury Secretary Steven Mnuchin penned by Senate Finance Committee Chairman Chuck Grassley, R-Iowa, Senate Finance Committee ranking member Ron Wyden, D-Ore., and House Ways and Means Committee Chairman Richard Neal, D-Mass.

Congress clearly meant for expenses paid with PPP money to be deductible, said Edward Karl, vice president of taxation for the American Institute of Certified Public Accountants (AICPA), which has lobbied on this and other PPP-related issues. For many small businesses, he said, big losses in 2020 will make this less of a problem — but it will still be important to resolve before tax bills start arriving. And even if it’s challenged in court, he said, that doesn’t help small businesses in the short term.

“I think the only avenue for that now is some kind of legislation to fix the problem,” Karl said. “It doesn’t look like the IRS is going to overturn it at all.”

That tax bill could be substantial for some businesses, says an accountant and shareholder in the tax division of LBMC PC. The increases could amount to 21% for some corporations to 37% for some self-employed people, he said.

But taking the PPP loan — and being able to survive the pandemic — still comes out as a net positive for many businesses, he added.

“The fact that it is taxable, it’s not a great result, considering it feels like a bait and switch,” LBMC said. “But they should be, net, better off.”

Another question, however, is timing, he said. If a loan is not fully forgiven until 2021, then it remains a loan and those expenses wouldn’t apply until the 2022 tax year, potentially allowing businesses more time to pay their taxes. Or, he said, businesses may want to push as fast as they can to get the loan forgiven this year.

“There is some strategy to be played there. When do you want this income recognized?” LBMC said. “I don’t think we are doing anything nefarious there. You are being strategic about how you are handling your situation.”