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.
Lauren Hoffman is an associate at Brooks Pierce who advises and represents employers in both employment law and commercial litigation matters. She assists clients with drafting workplace handbooks, policies, and employment agreements, and provides practical guidance on sensitive workplace issues including harassment, discrimination, and workplace violence.
Tricia Goodson is a partner at Brooks Pierce who counsels management clients on a variety of employment-related issues, including federal and state discrimination and harassment laws; wage and hour compliance; employment policies and handbooks; employment agreements; restructuring; severance programs and policies; confidentiality, assignment of inventions and noncompetition agreements; trade secrets; workplace violence; and drug and alcohol screening. She also represents employers in matters before governmental agencies and in state and federal courts.
Kemper Patton, an associate at law firm Brooks Pierce, litigates labor and employment disputes involving anti-discrimination laws, employment agreements, wage-and-hour issues and unfair labor practices. He also advises clients in a variety of industries on all types of labor and employment matters.
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.