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.
Jeremy King is principal and co-founder of Crafted ERP. He began his career in investment banking and corporate development where he focused on the technology and manufacturing industries. He went on to hold senior executive roles in the finance, e-commerce, and software industries, including as the CFO of a publicly traded software company. Eventually, he took over the national technology and management consulting practice of a Top 20 CPA firm where he learned the intricacies of the craft beverage industry and identified a desperate need for modern technology solutions. He co-founded Crafted ERP in 2017 as a solution for breweries, wineries, distilleries and more.
David Erdman is a managing director at Baker Tilly Municipal Advisors after retiring from a nearly 30-year career as issuer for the state of Wisconsin.
Arleas Upton Kea is deputy to the chairman and chief operating officer at the Federal Deposit Insurance Corp.
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.