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.
Sr. Director, Technical Accounting Consulting, RSM US LLP
Douglas Lynam is a partner at LongView Asset Management in Santa Fe, New Mexico and the author of "From Monk to Money Manager: A Former Monk's Financial Guide to Becoming a Little Bit Wealthy — and Why That's Okay"
Bill Thompson serves as financial applications analyst for Centage Corporation. He is an expert in corporate finance and accounting, with extensive experience in financial controls, corporate and partnership taxation, audits (cash/AR/AP/fixed assets), reporting, financial systems, cost containment, budget management and tax strategy consulting. At Centage, he spearheads solutions deployment, client onboarding and product functionality training for Centage’s Planning Maestro, the cloud-native planning and analytics platform that delivers year-round financial intelligence.
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.