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.
Fleming Shi is senior vice president, advanced technology engineering at Barracuda Networks, which provides security, networking and storage products based on network appliances and cloud services.
Donald Moon is a senior associate in Mayer Brown’s Chicago office and a member of the Technology Transactions practice. Donald advises on all types of complex commercial transactions, including those involving IT outsourcing, business process outsourcing, facilities management outsourcing, data center leasing, technology licensing, cloud computing, hosted service agreements, and privacy and security issues.
Brad Peterson is a partner in Mayer Brown’s Chicago office and leads the Technology Transactions practice. Brad has focused his practice for 20 years on helping companies work better with their technology and operations suppliers. In the past five years, he has represented clients in increasing numbers of contracts with digital services providers, including cloud, data analytics, “as a Service” and automated process scopes and cyber security and privacy issues related to those scopes.
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.