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.
Paolo Sironi is an author on economics, finance and technology. He is elected member of IBM Industry Academy and mentors top managers on business model transformation in the digital era.
Sri Gowd is senior director of North American deposits at Nomis Solutions, where he is responsible for managing all aspects of consulting, project delivery, advisory services and ongoing support for several of the top retail banks in the U.S. and Canada. Previously, Gowd served as director of global consulting at Fractal Analytics, where he managed a team of analytic and business resources focused on solving key strategic problems for financial services firms.
Scott Stewart is CEO of the Innovative Lending Platform Association.
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.