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.
Alan S. Kufeld, CPA, is a partner at PKF O’Connor Davies LLP. He has provided guidance on complex tax issues for financial services clients, startup and mature hedge funds, hedge fund and private equity general partners and pass-through entities, among others. He has advised CFOs and the general partners of its funds on management company accounting and best practices while providing a range of income, sales and use tax, charitable, estate, gift and entity tax planning, compliance and reporting.
Jill Cantor, a CPA and attorney, is a senior manager at PKF O’Connor Davies LLP and has been a member of the firm’s state and local tax practice since 2012. She has over 20 years of tax experience, beginning her career at one of the Big Four. She went on to work at publicly held companies in their tax departments and then, ultimately, as a tax director for one of the companies.
Sandy Weinberg is a principal at PKF O’Connor Davies LLP and leads the firm’s state and local tax practice, as well as the tax credit and incentive practice. He has more than 23 years of tax experience, including 18 spent with two Big Four firms, where he served, in part, as a state tax director.
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.