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.
Ozgur B. Kan is a Managing Director and the leader of Credit Analytics Practice in Berkeley Research Group.
Jeremy R. Newell is executive managing director, head of regulatory affairs and general counsel of The Clearing House Association.
André Christ is co-founder and co-CEO of LeanIX. André's passion lies in enabling organizations and their employees to build better products by moving to a modern IT architecture. Before André co-founded LeanIX, a software-as-a-service vendor, he gained extensive experience as a management consultant at the world’s largest logistics company. In this role, he advised CIOs and IT leaders on strategic topics at the interface of business and IT. Projects included the execution of a global IT complexity reduction program and the definition of an IT service and cost charging model for their world-wide data centers. During his studies of information science in Germany and France, he built modern software architectures for both startups and large enterprises. He is a global thought leader and has spoken at several high-influence industry events including Gartner’s EA Summit, Hamburger IT Strategy Days and Rethink! IT.
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.