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.
Iris Zarecki is vice president of marketing at Continuity Software.
Varun Ebenezer is a senior IT audit manager at BMO Financial Group, USA, and a member of the ISACA.
Sofie Quidenus-Wahlforss is the CEO and founder of omni:us, an AI provider helping the insurance industry embrace digitisation. Sofie, who was recently listed as one of Forbes ‘Top 50 Women in Tech’, originally founded omni:us after several successful business ventures, the first of which was set up when she was 21. Twelve years later in 2015, along with her team of co-founders, Sofie launched omni:us as a way to enable insurance companies to fully automate and streamline the claims process, utilising emerging AI and machine learning technology to understand, extract and validate data from a large variety of documents.
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.