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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Dr. Peter Hovard is Lead Behavioural Scientist at RGA, based in RGA’s London (U.K.) office. His role is to apply behavioural science principles and methods to RGA and clients’ challenges. Peter previously worked as Behavioural Science Lead for UK general insurer RSA. As the organisation’s first behavioural scientist this involved introducing behavioural thinking in areas such as digital behaviour change, product development, claims and counter fraud. Peter has a PhD in experimental psychology from the University of Sussex, has taught university classes across psychology and has published in peer reviewed journals on eating behaviour, appetite and atypical perception.
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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.