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.
Nina Dorata, Ph.D, CPA, is a professor of accountancy at New York's St. John's University, and she is also the chair of the New York State Society of CPAs Committee for Future of Accounting Education. Her professional experience includes roles at Price Waterhouse, NY. E.F. Hutton Inc., and Staff Builders. Currently, she helps write, review and update the CPA preparation content for UWorld Roger CPA Review.
Christopher A. Steele is a partner at MendenFreiman LLP and a former shareholder in the Atlanta office of Chamberlain Hrdlicka’s Trusts and Estates Practice who counsels clients in a variety of tax, trust and estate matters, including planning for business owners.
Jasmin Severino Hernandez serves as an associate in Chamberlain Hrdlicka’s Atlanta office Trusts & Estates Practice Group. She helps clients in creating efficient and effective estate plans and implementing beneficial tax planning strategies. Her work includes the design and preparation of key estate planning documents, estate and gift tax planning, charitable planning, and probate and estate administration. She may be reached at (404) 658-5481 or by email at jasmin.hernandez@chamberlainlaw.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.