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.
Lewis Rinaudo Cohen is the co-chair of the digital assets and emerging technology practice group at Cahill Gordon & Reindel LLP, known as CahillNXT, which focuses on the use of blockchain, crypto assets and tokenization across all aspects of capital markets and all areas of economic activity. Lewis is a frequent public speaker on the topic of blockchain and the financial markets, and has been included for many years as a "Band 1" practitioner by leading independent firm Chambers and Partners USA.
Jason Rozovsky is head of legal at Interop Labs, the initial developer of the Axelar network, the Web3 interoperability platform. Jason has worked in the blockchain space for nearly a decade, having previously been global legal lead for blockchain at Accenture and assistant general counsel at R3, an enterprise blockchain company.
Alice Grey Harrison is managing partner of AGH Consulting Group.
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.