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.
Chris Hall is senior tax officer at Vertex Inc. He has over 30 years of experience managing all aspects of both direct and indirect tax matters including tax compliance, audits, planning, litigation management and systems implementations.
Melissa Loudon is a BenefitsVIP® team lead at Corporate Synergies, bringing extensive experience in employee benefits, health insurance and customer service. Since joining Corporate Synergies in 2009, Melissa has built deep expertise in benefits administration and employee support. In her current role, she helps guide the BenefitsVIP team while assisting employees and clients with benefits-related questions and service needs.
Jennifer Hui is a Senior BenefitsVIP® Representative at Corporate Synergies, where she draws on her extensive experience in employee benefits and customer support to deliver concierge-level service to plan participants. After earning her degree in Risk Management and Finance from Temple University in 1995, Jennifer launched her career at Independence Blue Cross, where she spent over a decade. She joined Corporate Synergies in 2006, where she continues to serve as a dedicated resource for employees and their dependents navigating their benefit programs.
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.