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.
Chris McMahon was Senior Editor for Insurance Networking News.
David Van Bruwaene is a purpose-driven serial entrepreneur, philosopher, and educator; a leader in consumer and business strategy for ethical technologies. He is the founder and CEO of FAIRLY, a governance, risk, and compliance solution built to help businesses accelerate responsible AI models to market. Through FAIRLY, Van Bruwaene is working to promote and protect human rights at a time of growing concern of AI model development. With academic roots in Cognitive Science and Philosophy at Cornell University, David has academic relationships at UC Berkeley, the University of Ottawa, the University of Waterloo, and the University of Guelph.
Stacy E. Dow is the national leader of financial consulting at RSM US LLP. She has over 25 years of experience providing audit, tax and financial advisory services. She has extensive experience with liquidity events and works closely with the management of middle market companies to assess internal controls and to assist with financial reporting needs. She supports both public and private companies in supporting their finance organizations to help solve technical challenges as well as identifying practical strategies for process improvements throughout the organization.
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.