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.
Jerry Maginnis, CPA, is a retired KPMG partner who served as the managing partner of the firm's Philadelphia office. He currently sits on several public company boards and is the author of "Advice for a Successful Career in the Accounting Profession"
Jason Stverak is the chief advocacy officer of the Defense Credit Union Council.
Souvik Das is chief product and technology officer at Clearwater Analytics. He was most recently CTO at Zenefits, where he led all product development, operations, infrastructure, information security and information technology. He served as senior vice president of engineering at Grand Rounds prior to Zenefits and prior to that served as chief technology officer at Capital One Auto Finance, leading all of engineering for the multibillion-dollar business unit. At Capital One, he led the migration of COAF's on-prem infrastructure to public cloud, and the modernization of COAF's technical stack. Before that, he spent a decade at PayPal, where he held a number of increasingly responsible management positions in software engineering including leading the merchant technology team, a global team of several hundred engineers.
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.