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.
Mark J. Masson is a partner at Axiom Consulting Partners. Prior to joining Axiom, he spent five years as a pilot plant operations leader and chemical engineering R&D scientist for Merck & Co.
Bridget Berg holds the position of principal, industry solutions within the property intelligence group for CoreLogic, where she leads the delivery of fraud risk management solutions to the mortgage industry. With more than 30 years of major financial institution experience, she has focused on all aspects of mortgage fraud, managing investigations and developing fraud risk programs and analytics.
Prior to joining CoreLogic, she was the vice president of fraud strategies at Wells Fargo Home Mortgage. She earned a bachelor’s degree in finance from the University of Saint Thomas.
Kimberly Harris-Ferrante is a Vice President and Distinguished Analyst in Gartner's Global Financial Services Industry Research and Advisory. Ms. Harris-Ferrante is responsible for monitoring the business and technology trends within the global property and casualty and life insurance industries. Her areas of specialization includes the business strategies and technologies to support digital insurance, customer experience management, claims transformation, advanced analytics, and artificial intelligence.
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.