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.
Don Reiser is a managing director at CBIZ MHM who serves as the national leader of the CBIZ international tax practice. He has more than 30 years experience providing international tax consulting services to public and privately-held U.S. and foreign-based corporations as well as foreign individuals and businesses investing in the United States.
Jan Smallenbroek is a managing director of tax at CBIZ MHM who has been serving clients since 1994. He focuses on supply chain structures and the related international tax and transfer pricing implications, assisting companies to efficiently structure their manufacturing and distribution tax footprint. He also assists with global tax rate structures, tax filings and compliance and transactional due diligence services.
Richard L. Chen is the founder of and lead counsel at Brightstar Law Group, a law firm specializing in providing RIA compliance consulting and corporate law services to wealth managers, financial planners, family offices and private fund sponsors.
Before launching his practice, Chen spent many years at several preeminent law firms in New York including Simpson Thacher & Bartlett; K&L Gates; Schulte Roth & Zabel; and Arnold & Porter.
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.