IRS denies deductions for forgiven paycheck protection loans

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.

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.”

IRS-Building-light
The IRS headquarters building in Washington, D.C.
Andrew Harrer/Bloomberg

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.

CORONAVIRUS IMPACT: ADDITIONAL COVERAGE

Meghan Loomis is a principal with Baker Tilly's digital solutions practice. She has spent her career helping clients drive back-office transformations using technology as an enabler of change. During her time with Baker Tilly, she has championed and led the research, development and growth of several key technology alliances. She drives transparent communication in building new relationships and works to ensure mutual benefit and success.

Courtney Csik is a director with Baker Tilly's digital solutions practice. With more than twelve years of experience, Courtney has worked with organizations, big and small, across industries in the commercial and public sectors to define their Cloud strategies, implement modern technologies and achieve digital transformation.

Lawrence "Larry" Sprung, founder of Mitlin Financial

Lawrence Sprung, CFP, is the founder and wealth advisor of Hauppauge, New York-based Mitlin Financial.

He has more than a quarter-century of experience in the wealth management field.

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.