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.
Christopher M. Russo recently served as the Republican chief economist for the U.S. Congress Joint Economic Committee. He previously held positions with the U.S. Senate Banking Committee, Federal Reserve Bank of New York and Federal Reserve Bank of Chicago. He holds a master's degree in financial mathematics from the University of Chicago and is currently completing his doctoral dissertation in economics at George Mason University.
Laura Drabik is a frequent commentator on issues of transformation and innovation in the P&C insurance industry and Chief Evangelist at Guidewire. Drabik also oversees the Guidewire Insurtech Vanguard program, which helps insurers learn about the hottest new insurtechs and how to leverage their capabilities quickly and efficiently. She is also the author of Drabik Digest and the host of the InsurTalk podcast.
Michael Giusti, M.B.A., is an analyst at insuranceQuotes.com, which publishes in-depth studies, data and analysis related to auto, home, health, life and business insurance. In his role as analyst, Michael studies the insurance industry in order to provide trusted tips, advice and insights. He has worked as a journalist for more than 20 years, including as a reporter at a daily newspaper in Florida, as an editor at a regional business journal, and as a writer for national and international publications. Michael is based out of New Orleans.
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.