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.
Deanna Cuadra is a senior reporter at Employee Benefit News. Her work covers healthcare, U.S. policy and reform, challenges faced by women and parents in the workplace and innovation in work culture and leadership. Deanna previously worked as an editorial assistant at HealthDay, and was the co-founder and editor-in-chief of MidWave Magazine, a multimedia platform where college students were able to share their takes on pop culture and politics at the onset of the pandemic. When Deanna isn't knee-deep in healthcare policy, she directs and produces short films and documentaries that center marginalized communities. Deanna graduated with a bachelor's degree in film and media studies and East Asian studies from Columbia University.
Greg Barber, CPA, is the former managing partner of a Top 20 and a Top 40 accounting firm and is now an advisor to accounting firms. Reach him through his website, www.gbarberc.com.
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.