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.
Neekis Hammond, managing director with Sageworks, provides financial institutions with advisory services and thought leadership, and consults with product development on compliance and accuracy. He specializes in the Allowance for Loan Lease Losses; CECL preparation and methodology; acquired loan accounting and valuation, stress testing, and various portfolio analysis topics. Prior to joining Sageworks, he held a key role within Elliott Davis Decosimo’s FIG Consulting division where he provided valuation, accounting and loan analysis services. Prior to Elliott Davis Decosimo, he was with a multi-billion dollar financial institution where he worked on acquisitions ranging in size from $130 million to $2 billion and was an auditor with a regional CPA firm.
Ken Tsai is global vice president, head of cloud platform and data management at SAP.
Kishore Durg is senior managing director, Growth and Strategy and Global Testing Services Lead at Accenture.
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.