Bloomberg reports that if SMBs qualify for loan forgiveness by using 75 percent of the funds to pay workers, they cannot deduct the wages or other business expenses paid for by the cash on their tax return, according to the seven-page IRS notice published on Thursday (April 30).
“This treatment prevents a double tax benefit,” the agency said in the notice. “This conclusion is consistent with prior guidance of the IRS.”
The IRS guidance clarifies questions in the $659 billion SBA business loan program designed to help businesses stay afloat as COVID-19 has brought the economy to a standstill, the news service reported.
PPP was established under the CARES Act. Operated by the Small Business Administration (SBA), it provides cash for two months of payroll costs. The measure, enacted by Congress in March, allows recipients to use the proceeds for payroll costs, employee healthcare benefits, interest on mortgage obligations, rent, utilities and interest on any other debt. The loans do not have to be repaid if employers keep workers on the job or rehire laid-off workers.
While the measure said the loan is not subject to taxes, it failed to let companies know whether they could still write off the expenses they covered with that money. In any other circumstance, IRS regulations allow companies to write off business expenses, such as wages, rent and transportation expenses. The clarification adds the latest wrinkle as companies compete to secure PPP loans, the news service said.
The initial $310 billion program launched on April 3 for the first wave of assistance with the goal of getting money into the hands of the neediest businesses. But when the money was exhausted in 13 days, small businesses alleged they were shut out as publicly traded companies, nationwide franchises and preferred bank customers got the funds. The second round of funding was approved late last month for $349 billion, designated for smaller firms.