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.
Swapnil Shinde is the co-founder and CEO of Zeni, the first AI-powered finance concierge for startups. Zeni’s intelligent bookkeeping, accounting and CFO services were designed to meet the needs of companies ready for rapid growth. Prior to Zeni, he co-founded Mezi, the AI-powered travel concierge and booking platform, acquired by American Express in 2018. He also co-founded Indian music streaming service Dhingana, acquired by Rdio in 2014, and Twin Ventures, an angel fund started with his twin brother Snehal Shinde. He has nearly two decades of experience as a technologist and product entrepreneur, and has worked at companies including Yahoo!, Symantec and IBM Software Labs.
Sabrina Kieffer is the COO at online learning platform Skillshare.
Raj T. Chawla is the global head of financial services at BeyondMinds.
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.