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.
Scott Sowers is a reporter based in the Washington, D.C., Bureau where he covers ESG issues, cyber-crime, lobbying, and taxation. Prior to joining The Bond Buyer he freelanced for The Washington Post, The New York Times and The Atlantic writing about real estate. Other areas of expertise include architecture, design, energy, housing policy, automotive, and the utilities.
Gadi Shamia is the CEO and co-founder of Replicant, a leader in Contact Center Automation. Replicant helps companies automate their most common customer service calls while empowering agents to focus on more complex and nuanced customer challenges with natural sounding conversations. Prior to Replicant, Gadi helped to take Talkdesk from a seed-stage company to a Unicorn startup as its COO, and played a key role in architecting and executing its 20X growth in people and revenue. Gadi also held board roles at EchoSign (acquired by Adobe), Intacct (acquired by Sage), Algolia, and Talkdesk.
Elizabeth Lawrence is an editorial intern at American Banker.
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.