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.
Patricia Pechter is the chief medical officer with HealthJoy.
Jack Castonguay, Ph.D., CPA, is vice president of strategic content development – accounting, finance, and exam prep, at Knowfully Learning Group. He holds a BBA in accounting and a Master of Science in accounting from James Madison University, and received his Ph.D. in accounting from the University of Tennessee. He began his career in public accounting with a Big Four accounting firm auditing manufacturing and financial services clients, and has taught financial accounting, auditing, and research seminars at the graduate and undergraduate levels and is currently an assistant professor at Hofstra University.
As the time comes for businesses to apply for PPP loan forgiveness, CPAs can provide vital assistance to ensure success for their clients.
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.