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.
Phil Dunkelberger is CEO of Nok Nok Labs.
James M. Brower Jr., CPA, is a partner and State and Local Tax Leader at Marks Paneth LLP.
Chana R. Schoenberger is the editor-in-chief of American Banker. Previously, she was the editor-in-chief of Financial Planning after joining Arizent in 2020.
She has conducted print and on-stage interviews with top executives, regulators, and experts, including:
- Santander Executive Chairman Ana Botin
- U.S. Bank CEO Gunjan Kedia
- BMO US CEO Darrel Hackett
- Nasdaq CEO Adena Friedman
- Truist's Scott Stearsman
- New York State Superintendant of Financial Services Adrienne Harris
In her prior role, she was the managing editor for U.S. wealth management at J.P. Morgan. Before that, she was a columnist and freelance journalist, and previously worked at Bloomberg News, Dow Jones/The Wall Street Journal, and Forbes. A graduate of Harvard College, she received her master's degree as part of Columbia Journalism School's Knight-Bagehot Fellowship in Economic and Business Journalism. Currently, she serves on the board of the journalists' professional association SABEW, the Society for Advancing Business Editing and Writing. She is now based in the Boston area after living in New York City, Tokyo and Canada.
Follow her on X at @cschoenberger.
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.