Small businesses that manage to get their Paycheck Protection Program loans forgiven may find themselves losing valuable tax breaks, according to new guidance from the Internal Revenue Service.
Companies that qualify for loan forgiveness under legislation Congress approved won’t be able to deduct the wages or other businesses expenses they paid for using the loan, according to an IRS notice published Thursday.
“This treatment prevents a double tax benefit,” the agency said in the notice. “This conclusion is consistent with prior guidance of the IRS.”
The guidance clarifies a point of confusion in the $670 billion small business loan program to help businesses struggling as the coronavirus has brought the economy to a standstill. The law states that the forgiven loan won’t be taxed, but didn’t specify whether companies could still write off the expenses they covered with that money.
Michael Ronickher is of counsel at Constantine Cannon LLP in Washington, D.C., specializing in whistleblower matters.
Eric Havian is a partner at Constantine Cannon LLP in San Francisco specializing in whistleblower matters.
Bart McDonough is chief executive officer at Agio, a managed IT and cybersecurity service provider. He founded the organization in January 2010.· Bart is a distinguished speaker at the FBI International Conference on Cybersecurity, Dreamforce, the University of Oklahoma and HFMweek’s Hedge Fund Technology Leaders Summit.· He has counseled professionals at major financial institutions including Citigroup, Goldman Sachs, Credit Suisse, JP Morgan, Morgan Stanley, Jefferies and Bank of America.· He was previously managing director of information security, server infrastructure, database administration and application support at SAC Capital Advisors between 2001 and 2010.
The tax code permits companies to write off businesses expenses, such as wages, rent and transportation expenses, but generally doesn’t allow write-offs for tax-exempt income.
The ruling adds to the list of stumbling blocks facing businesses as they try to qualify for the Paycheck Protection Program loans.
Small businesses have reported technical issues in trying to apply for the funds, which restarted Monday after the first round of funding ran out after just 13 days.
The program, run by the Small Business Administration, provides funds to cover eight weeks of payroll costs and the loans are forgiven if the employers keep workers on the job or quickly rehire laid-off workers.