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.
Robin Lyons is the technical research manager for ISACA, the professional association for IT governance.
Mark Damphousse is director of managed services for Carousel Industries, a provider of IT consulting, management and integration services.
David Sharp is president of PaySimple. He has 21 years of experience in the payments and software industry, including eight years as vice president of the Western region for global payments. During his career, he has led business development for payment network processing, agent bank and ISO programs, as well as a variety of alternative payment solutions. David served as a non-commissioned officer in the U.S. Army following graduation from the Defense Language Institute and holds a BBA in international business from the University of Georgia.
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.