IRS denies deductions for forgiven paycheck protection loans

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.

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.”

IRS-Building-light
The IRS headquarters building in Washington, D.C.
Andrew Harrer/Bloomberg

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.

CORONAVIRUS IMPACT: ADDITIONAL COVERAGE
Chase Petrey

Chase Petrey is the President of Applied Pay at Applied Systems. He has a diverse career in the enterprise software industry, bringing with him a unique set of fintech, Software as a Service (SaaS), and analytics skills. Chase also serves as President of the Salt Lake City Chapter at Silicon Slopes, a nonprofit organization that exists to empower Utah's tech community to learn, connect, and serve in order to make entrepreneurship open and accessible to all.

Christina Lee

Christina Lee is a Researcher at ACTUAL, where she focuses on comprehensive policy and industry-related research. With a keen interest in energy and sustainability, Christina delves into topics ranging from renewables and green hydrogen to supply chain dynamics and electric vehicles (EVs). Her research involves synthesizing complex data and trends to provide actionable insights for decision-makers in both public and private sectors. Christina earned her BA in Urban Studies and Planning from the University of California, Berkeley, from the College of Environmental Design.

Karthik Balakrishnan

Karthik Balakrishnan, Ph.D, is the President and Co-founder of ACTUAL, the Capital Planning Software that allows enterprise CFOs to greenlight the investments which allow them to meet their sustainability goals. With over a decade of experience working at the intersection of asset transformation and supply chain, Karthik has established himself as a sought-after leader, speaking at various events on sustainable development, government policy and global implementation. Karthik holds a PhD and MS from Stanford and a BS from UC San Diego all in Aerospace Engineering.

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.