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.
Steve Whitehurst is CEO of Health Fidelity.
James Mendelsohn is the chief operating officer and chief revenue officer at Breakout Capital Finance. He was formerly the chief marketing officer at CAN Capital. Mendelsohn also worked at the consulting firm McKinsey & Company, where he advised global clients in the financial services sector on marketing analytics, market intelligence, digital strategy, and customer experience.
Ben Richmond is a chartered accountant and managing director, North America, at Xero. He started his career in a large regional accounting practice before joining New Zealand's largest telecommunications company working on SEC compliance and investor reporting, while also serving a two-year term on the board of one of New Zealand's largest charitable foundations.
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.