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.
Charles Hylan, CPA, MBA, is the managing director at The Growth Partnership, where he advises clients within several areas of TGP’s service offerings, including marketing, strategic planning, partner relationships and leadership development. Additionally, he is a senior business developer at ABLE: CRM for CPAs and leads efforts to bring the Rosenburg survey, a benchmark report comparing over 100 metrics across nearly 400 firms to the accounting marketplace. He has experience consulting and working with accounting firms ranging from sole practitioners to national and Big Five firms.
Louisa Harbage-Edell is the director of market intelligence and strategy for Arity. She has spent her entire career in the insurance industry and most of that surrounded by telematics, first as an actuarial analyst at Progressive Insurance, before transitioning to business consulting, where she spent over a decade helping to build initial demand for telematics programs across the insurance industry, including launching the precursor product to DriveAbility.
Megan Klein is the Actuarial and Rating Services Director at Arity. Her team is responsible for the actuarial support of Arity’s telematics models, enabling insurance companies to execute on their goals around telematics. Leveraging over a decade of P&C insurance product and pricing experience, Megan ensures telematics risk models are actuarially sound, consumable by users, and supportable with regulators. Megan received her bachelor’s degree in Mathematics: Statistics and Actuarial Science from the University of Northern Iowa. She is a Fellow of the Casualty Actuarial Society.
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.