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.
Derek Williams is the president and CEO of Century Bank & Trust in Milledgeville, Ga., and the chairman of Independent Community Bankers of America.
Luke Cornetta is a director with Alvarez & Marsal Taxand in New York. He specializes in implementing low-code/no-code solutions to optimize and automate tax department processes and has worked across industries including investment management, energy, consumer retail and agriculture.
Cody Dixon is a managing director with Alvarez & Marsal Taxand in Dallas. He has over 16 years of experience helping clients design and implement tax technology solutions, including assisting clients across industries design and build digital solutions to automate key tax functions. He specializes in extracting data from ERP systems such as Oracle and SAP to transform for tax.
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.