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.
Dave Jacobs is the Co-founder and Co-CEO of Homethrive, an innovative age-inclusive employee benefit that provides expert Care Guides and supportive technology to employees who are caregiving for an aging loved one.
Eric Glass is a municipal portfolio manager and impact investor at AllianceBernstein.
Stefanie Coleman is an Australian, New York-based, principal in the Ernst & Young LLP People Advisory Services practice who focuses on banking and capital markets. She has advised the world’s leading banks on a broad range of workforce strategy issues across the US, Australia, Middle East, Asia and the UK. In 2019, she was recognized by Workforce Magazine as a Workforce Game Changer.
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.