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.
Steve Johnson is the co-founder and head of product for insured.io. He has over two decades of experience in the insurance industry, working in multiple development and underwriting roles with P&C lines insurance companies.
Zachary Decker is a master of accounting student at the University of Northern Iowa and serves as a sergeant in the Iowa National Guard. He served as the president of the accounting clubs at the University of Northern Iowa and Des Moines Area Community College and held positions as Treasurer of the University of Northern Iowa's Veterans Association and Global Business Club. He recently accepted a position to start his accounting career at PwC in Austin, Texas.
Attila Toth is the founder and CEO of ZestyAI, a risk platform for property and casualty insurers. With over two decades of experience building high-growth businesses at the intersection of data and climate science, Attila has worked with insurers and regulators across the U.S. to scale AI adoption responsibly. Before founding ZestyAI, he held leadership roles at C3 AI and SunEdison and was a strategy advisor at McKinsey & Co.
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.