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.
As state finances across America are upended by the coronavirus, almost all of them face the same, self-imposed, problem: how to balance their budgets.
Jimmy O’Reilly is a senior associate at Novarica. Prior to joining the firm, Jimmy worked in financial planning and wealth management. He has a BA in Economics and a Creative Writing Certificate from Wesleyan University. He can be reached directly at joreilly@novarica.com.
Paul Legutko is Vice President of Digital Marketing and Analytics at Novarica. Paul has 20 years of experience in research and analysis, specializing in designing and applying analytical solutions to a wide range of data sets and problems. After nine years in digital analytics consulting, Paul spent five years as a senior manager at Ernst & Young, focused on activating customer data within marketing and business strategy contexts. Prior to joining Novarica, Paul led Business Intelligence at Hill Holliday. Paul holds a PhD from the University of Michigan and a BA from Harvard University. He can be reached directly at plegutko@novarica.com.
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.