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.
Patrick Goodwin is president of Strategic Resource Management, Inc., Memphis, Tenn. He can be reached at 901-681-0204 or pgoodwin@srmcorp.com.
Kevin Spencer is a partner at McDermott Will & Emery and edits the law firm's “Tax Controversy” blog. He represents clients in complicated tax disputes before the IRS at the IRS Appeals and Examination divisions. In addition to his tax controversy practice, Kevin has broad experience advising clients on various tax issues, including tax accounting, tax penalties, IRS procedures, reportable transactions and tax shelters.
Robin Greenhouse is a partner at the law firm McDermott Will & Emery in Washington, D.C. Robin represents businesses and individuals in resolving complex, large-dollar federal tax controversies. Over her 30-year career as a government and private practice tax litigator, she has argued more than 100 cases in federal courts at every level.
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.