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.
Zack Scott serves as Management Consulting’s Strategy Lead for Financial Services International at digital consultancy Publicis Sapient, delivering large-scale digital transformation programs across EMEA. Previously, he was Principal at Oliver Wyman within the financial services practice, investment analyst at Hay Creek Hospitality and he’s on the Board of Trustees of Wyman Worldwide Health Partners.
Jasleen Singh is a reporter at Employee Benefit News.
Amanda Dolina, CPA, CAPM, is the founder of West Bridge Finance Solutions, a consulting firm specializing in strategic financial and accounting guidance for small and midsized businesses and nonprofit organizations. With extensive experience in implementing robust accounting processes, auditing, consulting, and financial reporting, she provides insights and practical solutions to her clients. She leverages technology to develop metrics and consolidate information, helping organizations of all sizes share and understand key financial data.
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.