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.
Bruce Lowthers serves as chief operating officer of integrated financial solutions at FIS.
Will Mitchell is co-founder and CEO of Contract Simply, a construction payments platform. As a former real estate developer, he oversaw $400M of construction loans while developing nearly 800 homes and millions of square feet of commercial real estate space.
Jason Collier is co-founder of Scale Computing, a market leader in hyperconverged solutions. Previously, Collier was vice president of technical operations at Corvigo where he oversaw sales engineering, technical support, internal IT and data center operations. Prior to Corvigo, Collier was vice president of information technology and infrastructure at Radiate. There he architected and oversaw the deployment of the entire Radiate ad-network infrastructure, scaling it from under one million transactions per month when he started to more than 300 million at its peak.
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.