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.
Megan Moody, CPA, is a managing director and Nashville market leader at the consulting firm Embark. After earning a masters degree in accounting from Belmont University in Nashville, she spent two years in the audit practice at Ernst & Young and then almost 15 years in the health care industry working at both public and private companies.
Jay Lee is the Chief Technology Officer at Colonial Surety Company, spearheading the design and distribution of innovative technology. Colonial Surety, a leading direct and digital insurer, is dedicated to providing customers with a straightforward and seamless experience when purchasing insurance and bonds. The company's online platform, combined with exemplary customer service, simplifies the insurance-buying process and removes the hassle from these transactions.
Sabrina Ticer-Wurr is a summer intern for Financial Planning through the Dow Jones News Fund.
She is a rising senior at Columbia University studying English Literature and East Asian Languages and Cultures. An aspiring business reporter, she was a deputy university news editor for the Columbia Daily Spectator, where she covered race/DEI and graduate schools.
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.