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.
Kevin M. Dulle is director of the experience innovations strategy team at NewGround, an architecture, design and delivery firm.
Robert Dominguez is an assistant general counsel and human resources consultant for Engage PEO. As part of the Engage HR team, Robert delivers comprehensive HR solutions for Engage’s California clients. He has represented employers in California on litigation matters and counseled them on HR related issues and changes in the law, such as California’s new Healthy Workplaces, Healthy Families Act.
Jay Starkman is the founder and CEO of Engage PEO. Engage provides HR services and counsel to help clients minimize costs and maximize efficiency through a full range of health and worker’s compensation insurance products, payroll technology and tax administration, risk management services and best-of-breed technology as part of an extensive suite of HR services. Starkman has a law degree from the University of Miami.
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.