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.
Johanna Baum is CEO and founder of Strategic Security Solutions (S3).
Dave Kelly founded of AnalyticsIQ 14 years ago after the successful acquisition of his former company, Sigma Analytics.
He is an alumnus from the University of North Florida and earned his MBA from Georgia Tech.
Eric Ayala is the senior vice president, Americas for Novidea, creator of the born-in-the-cloud, data-driven insurance platform that enables brokers, agents, and MGAs to modernize and manage the customer insurance journey. Eric has more than two decades of technology startup and venture capital experience. A Silicon Valley veteran, he has led multiple Sales and Marketing teams at startups funded by prestigious VCs such as NEA and Accel and Corporate VCs such as Dell and Microsoft.
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.