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.
Udi Hoitash is an accounting professor at Northeastern University in Boston.
Jen Farrell is director of agent and customer research at Liberty Mutual and Safeco Insurance, supporting independent agent distribution and product development. In her role, she conducts primary research and interprets industry trends to ensure Liberty Mutual and Safeco take a data-driven approach to the agent and customer experience. Jen brings nearly 15 years of experience in research and digital analytics, previously working with some of the world’s largest brands to uncover marketing insights and answer critical business questions. When she’s not studying consumers, independent agents, or the insurance industry, she can be found hiking through the woods in New England.
Demetrios Frangiskatos, CPA, is the leader of analytics and emerging methods at Top 10 Firm BDO USA. He has more than 22 years of experience providing accounting, auditing, and business advisory services. Currently, he oversees BDO’s assurance business line’s BDO Advantage team, where he focuses on the strategic research and development, deployment, integration and enablement of technology platforms and solutions within the assurance practice.
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.