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.
Amber M. Rogers is a partner in the Dallas office of the Labor and Employment group at Hunton Andrews Kurth LLP.
Amanda Martell is director of human resources for LifeSpeak Inc. She has extensive experience across a range of industries and is skilled in leadership, training and development, and employee relations.
Ellen Choi is the CEO of Edgefield Group, a consultancy that offers services at the intersection of AI, technology, and business transformation to solve Top 500 CPA firms' biggest challenges. She is the Co-Founder and Advisor at Aiwyn, a technology company helping accounting firms streamline their practice management. Aiwyn has been recognized with Forbes 100 Rising Stars, Boomer Visionary Award, and AccountingToday's Award. Her past includes working in Google' Finance team, Stanford engineering, and Harvard MBA. She is a serial entrepreneur with a passion for driving innovation in the accounting profession.
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.