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.
Anna E. Mallen is a J.D. candidate at Drake University Law School, Des Moines, Iowa.
John F. Fatino is a member attorney at Whitfield & Eddy Law in Des Moines, Iowa. He counsels financial cooperatives in proactive measures and risk avoidance including client education for board members and senior management regarding corporate governance and employment matters.
Frank Vari, JD, MTax, CPA, is the practice leader of FJV Tax, a CPA firm that specializes in complex international and U.S. tax planning. He can be reached via email at frank.vari@fjvtax.com or telephone at (617) 770-7286 or (800) 685-2324. He began his career in international and corporate tax consulting with Deloitte and KPMG in the Midwest and Dallas. He has also served as senior vice president of tax for a large publicly traded manufacturer as well as a large private equity-owned global publisher. Vari has also been an adjunct professor of taxation to law and business students on international tax and corporate mergers and acquisitions. He is also a frequent speaker and author on complex international tax topics and issues. He is a licensed CPA in Massachusetts and Ohio and a licensed attorney in Ohio and the U.S. Tax Court. His education includes a Bachelor of Science in Accounting, a Master of Taxation, and a Juris Doctorate degree.
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.