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 Barnard is a partner at Anders CPAs + Advisors. He helps privately held companies with strategic planning, cryptocurrency tax planning, business transition and succession planning.
David Knutson is the head of U.S. Fixed Income Product Management at Schroders. He joined the firm in 2016 as head of Integrated Research — Americas, managing the investment grade, municipal, emerging market and high yield research teams.
David was a senior research analyst at Legal and General Investment Management from 2007 to 2016, which involved coverage of global financial companies and emerging market issuers.
David is currently the chair of the Credit Roundtable and is active with the Sustainability Accounting Standards Board.
Brian Schaefer is Vice President and Wealth Portfolio Manager at Johnson Financial Group. He works with individuals, public entities and non-profit organizations to create customized investment solutions. Brian is a member of JFG's Fixed Income Group and Investment Research team.
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.