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.
Bruce Willey, JD, CPA, CExP, is the founder and owner of American Tax and Business Planning, where he advises established businesses, start-ups and individuals on tax planning, asset protection, exit planning and estate planning.
Jonathan Treiber is CEO of RevTrax.
With over 12 years of experience as an entrepreneur and CTO, Arach Tchoupani has helped lead the scaling of various startups in both Montreal and New York City. Having played a key role in multiple successes in New York, most notably, Lot18 and Primary.com, Arach moved back to Montreal to find his next adventure with the team at Breathe Life. He is passionate about scaling diverse and multi-disciplined technical teams who adhere to the agile methodology and are constantly iterating.
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.