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.
David Pope is a partner at Baker & McKenzie LLP. He focuses on state and local income tax, sales and use tax, property tax, payroll tax, personal income tax and unclaimed property. He represents clients in all aspects of state and local tax, including controversy, litigation, planning and restructuring matters.
Daniel J. Healy is a partner in Anderson Kill's Washington, D.C. office. He started his career with Anderson Kill and then served over five years as a Trial Attorney with the U.S. Department of Justice, Tax Division. He appeared as lead trial counsel in federal and state courts across the country, received numerous Outstanding Attorney awards and served as the E-Discovery Coordinator for the Tax Division.
Mark DiMichael, a partner in the valuation and forensic services department of Citrin Cooperman, specializes in litigation support and valuation services. His areas of expertise include divorce litigation, economic damages analysis, fraud investigation, cryptocurrency, white collar criminal defense, and business appraisals.
Daniel J. Healy is a partner in Anderson Kill's Washington, D.C. office. He started his career with Anderson Kill and then served over five years as a Trial Attorney with the U.S. Department of Justice, Tax Division. He appeared as lead trial counsel in federal and state courts across the country, received numerous Outstanding Attorney awards and served as the E-Discovery Coordinator for the Tax Division.
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.