TAX IMPACT OF THE PAYCHECK PROTECTION PROGRAM

Small businesses that have their Paycheck Protection Program loans forgiven are likely to lose the deduction on their PPP expenses according to new guidance from the Internal Revenue Service.

The wage and business expenses that companies use to qualify for loan forgiveness will not be deductible according to an IRS notice published last 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 new guidance clarifies a point of confusion in the $670 billion small business loan program to help businesses struggling from the shutdowns caused by the coronavirus. The law states that the forgiven loan will not be taxed as debt forgiveness, but it did not specify whether companies could write off the expenses they covered with the stimulus money.

The tax code permits companies to write off business expenses, such as wages, rent and transportation expenses, but generally doesn’t allow write-offs for tax-exempt income.

While the ruling adds to the list of challenges that businesses face, it is reasonable for the IRS to tell small businesses that they can’t write off expenses on income that was never taxed in the first place (no double-dip!).

It is possible that the deduction for these PPP expenses could be reinstated. Since the IRS issued the notice several senators have spoken out against it stating that it is contrary to the intent of the PPP and that a fix could come in subsequent legislation. However, until such legislation is passed, be aware that you will not be able to deduct any expenses covered with funds from a forgiven PPP loan.  

Small businesses have reported numerous issues in trying to apply for the funds, which restarted last Monday after the initial round of funding ran out after just 13 days.

Round 2 of the program, run by the Small Business Administration, provides funds to cover eight weeks of payroll costs. It is designed to encourage companies to keep their people away from the unemployment line, and fully engaged in the workforce.