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.
Iralma Pozo is an independent consultant with more than 15 years of financial expertise, and an adjunct lecturer in accounting at John Jay College in New York. She is an active member of the New York State Society of CPAs, currently serving on the statewide board and various committees. Most of her experience is in the not-for-profit sector, having held financial leadership and public accounting related roles. She has also worked for the Internal Revenue Service, and has experience working with entrepreneurs, small businesses, and the real estate, insurance and entertainment sectors. She worked as a director of finance and consultant at various nonprofit organizations.
Jakob Wilhelmus is associate director of the Milken Institute’s international finance and macroeconomics team.
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.