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.
Paul Gaynor is the global technology and alliance consulting leader at PwC with responsibility for setting PwC’s network technology and alliance consulting vision and strategy. With more than 25 years of experience at PwC, Paul has provided a broad range of financial, operational and technology consulting services to the firm’s clients in the areas of finance transformation, working capital optimization, ERP implementation and risk management.
Ed Zollars, CPA, is an instructor at Kaplan Financial Education and a frequent contributor to the site Current Federal Tax Developments. With more than 30 years’ experience as a CPA and tax expert, he is a graduate of Arizona State University where he received the Moeur Award for academic achievement.
Brian Radin is president of Comdata's prepaid and payroll card business.
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.