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.
Cagatay Zor is a fintech strategist and the head of the fintech and blockchain business line at Trumore.
Ciao-Wei Chen is an associate professor of accountancy at the Gies College of Business at the University of Illinois Urbana-Champaign.
Max Perkins is head of insurance solutions and COO for Spektrum Labs, an AI-first cyber resilience company that provides agents and tools to reduce the time, cost, and complexity of maintaining provable and effective security and insurability. Spektrum unifies the disconnected domains of cybersecurity, backup, and insurance into one continuous, automated system. By fusing these traditionally disconnected areas, Spektrum enables businesses to prove and maintain continuous resilience—from preventing cyber threats, to instant recovery, to securing financial coverage—all in one place. Spektrum unlocks resilience, automating and verifying the connection between security and insurance, so businesses can recover faster and protect their future.
Prior to joining Spektrum, Max's professional career had been focused on insurance and risk management with particular expertise in intangible boardroom risks such as cyber, privacy, and intellectual property, and the overall impact of technology on business. Max was head of Strategy & Innovation for AXIS Capital's Cyber & Technology underwriting division, where his responsibilities included risk capital management and leadership in launching the world's first securitized 144a Cyber Cat Bond. Prior to joining AXIS in April 2020, he was an insurance broker at Lockton Companies and an underwriter at AIG, CHUBB and Beazley – operating both in the US and London markets.
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.