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.
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Patrick Roach is a senior manager of international tax with MGO who advises both public and private entities in a variety of industries including e-commerce, cloud computing and the digital economy, biotechnology, manufacturing, and entertainment. He is an experienced tax professional with expertise in international direct tax planning, global expansion, policy analysis, risk management and business process improvement.
Sanjay Agarwal is an international and corporate tax partner and the office managing partner of MGO’s Silicon Valley office. He has over a decade of international and corporate tax experience and is an expert in a number of areas, including international and corporate tax consulting, transfer pricing and M&A transaction advisory services. He also serves as overall business advisor to his clients, which primarily consist of emerging and established technology companies and their founders and investors.
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.