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.
Luke Nicholson is an assistant professor of accounting at the Plaster College of Business and Entrepreneurship at Lindenwood University in Saint Charles, Missouri. He holds a Doctor of Business Administration with a concentration in accounting, an MBA, and a BS in accounting with a minor in Business. Dr. Nicholson has 10 years of experience in accounting. Prior to his academic career, he worked in public accounting conducting audits and completing tax returns for companies across various industries. He served as an assistant CFO in his previous accounting job.
Stephanie Mier is the Chief Insurance Officer at ServiceUp, an all-in-one tech platform transforming how fleets and insurers manage vehicle repairs. She has spent the past two decades in the Insurance Industry, building auto claim departments, specializing in accident management, writing policy, and launching products to focusing on decreased overall risk, customer retention and acquisition. Prior to ServiceUp, she spent the last 8+ years in the fintech mobility space, building Insurance for Turo, Fair Financial, Kyte on demand rental, and was a founding member to PAKT Embedded Insurance Brokerage.
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.