The U.S. Internal Revenue Service will allow businesses that got their Paycheck Protection Program loans canceled to write off expenses paid for with that money, changing policy after Congress passed a new legislation last month.
IRS advice Posted Wednesday rolls back previous rules that said recipients of canceled PPP loans couldn’t claim deductions for salaries, rent, utilities and other expenses covered by the loans. The change came after a bipartisan Congressional decision to clarify that business owners should be eligible for these tax breaks.
Recent stimulus legislation updated the Cares Act passed in March to “say that no deductions are disallowed, no tax attributes are reduced, and no base increases are disallowed because of the exclusion of an eligible beneficiary’s covered loan forgiveness gross income,” the IRS said in a statement.
The change is widely seen as a win for small businesses, which can use the tax-free money to generate more relief, which is generally prohibited by the tax code. Lawmakers said allowing the deductions was necessary to keep small businesses afloat amid waves of restrictions and weakening consumer spending stemming from the coronavirus pandemic.
Some businesses might pay a negative tax rate on their PPP money, meaning the tax benefits outweigh their loan amount. For business owners who pay the highest tax rate, that typically means they could save up to $37 on their taxes for every $100 of tax-free PPP money they received.
New IRS guidelines further expand money received from the government, said
“The PPP loan proceeds are free, if forgiven, effectively – so that’s a nice perk,” Zarlenga said.
Many small businesses expected to be able to claim the deductions based on the original wording of the Cares Act, said Andrew Gibson, managing partner at accounting firm BDO. Lawmakers made it clear their intention was for companies to claim the deductions after the IRS said they would not allow the tax breaks, he said. But IRS officials said they couldn’t update their guidance based on the intent — they needed a change in the law, so the issue went unresolved for months until until it is included in the December stimulus legislation.
The delay in solving the deductibility problem has created problems for small businesses, said Michael Greenwald, head of business taxation at the accounting firm Friedman. Other tax breaks – such as the 20% deduction, R&D credit and New Markets tax credit – interact with the write-offs, meaning companies are racing to figure out if they can still benefit from other tax advantages. they usually claim.
“Customers were clearly relieved when Congress passed this, but the flip side is they weren’t aware of the nuances,” Greenwald said. “When we talk to them about it, it’s like taking away their Christmas present.”
The $2.3 trillion bill providing Covid-19 relief and government funding for the fiscal year through 2021 includes $284 billion in additional funding for PPP loans, which were designed to limit a wave of bankruptcies small businesses that could cripple the economy. The plan allows certain companies to apply for a second round of funding if they can show losses during the pandemic. Deductions are also allowed on second-round loans.
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