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.
Eric Vanderhoef is a principal at Advanced Knowledge Management
David Dassler is a teaching assistant professor in the University of Denver's Daniels College of Business School of Accountancy. He brings over 32 years of accounting and finance experience to the classroom — working for firms including Xcel Energy, US West and PricewaterhouseCoopers. He previously taught at Daniels from 2012 to 2022 as an adjunct professor for the professional and executive MBA programs. He is a Colorado native and a Daniels alumnus, having earned his MAcc and BSAcc degrees in 1990. He is an active licensed CPA in the state of Colorado and holds the Chartered Global Management Accountant designation from the American Institute of CPAs.
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.