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.
Andy Hamilton is the Co-Founder and CEO of When, an AI-powered offboarding platform and severance solution. He has previously co-founded two technology startups, both of which were acquired by public companies. During the Covid pandemic, experiencing a layoff first-hand motivated Andy to create a better off-boarding and post-employment solution for employers. In his personal life, Andy enjoys playing tennis, riding his Peloton, and reading.
Eric Fairchild is a Managing Principal with Capco and leads the US Insurance Delivery Practice. The majority of his career has been spent as a management consultant for Retirement, Life and Annuities companies leading large and complex programs including policy administration systems implementations, book of business migration/conversion projects, large scale capability transformations, and agile transformations.
Kristine Miller is a principal consultant with Capco. She has over 20 years of experience in Financial Services designing and implementing innovative and results driven solutions that accelerate outcomes to complex challenges.
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.