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.
Jeff Haskett is CEO and co-founder of Clarus R+D, a technology company that enables businesses to unlock the value of R&D tax credits for innovation and growth.
Kevin Dehner is EY Americas sustainability tax deputy leader. Based in Cincinnati, he recently returned to EY as a leader in the national sustainability tax practice with more than 23 years of diverse technical and client service experience including eight years as an external auditor and 15 years as tax practitioner working with audit and non-audit clients on public and private company external audits, complex tax accounting and reporting, restatements, tax processes and controls remediation, transaction-related tax matters, and international, federal and state local tax planning. He was previously a shareholder at Clark Schaeffer Hackett and an adjunct professor at the University of Cincinnati, where he developed and taught coursework on business ethics and sustainability.
Vishal Jain is the vice president of wellness strategy and development at Prudential.
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.