IRS grants tax breaks on canceled PPP loans after law change
The U.S. Internal Revenue Service will allow companies with canceled Paycheck Protection Program loans to write off expenses paid with that money, changing policy after Congress passed new legislation last month. latest.
The IRS guidelines released on Wednesday override previous rules that granted recipients of PPP loans that had been canceled could not claim deductions for salaries, rent, utilities, and other expenses covered by the loans. The change came after a bipartisan decision in Congress to clarify that business owners should be eligible for these tax breaks.
The recent stimulus bill updated the Cares Act passed in March to “say that no deduction is denied, no tax attribute is reduced and no base increase is denied due to the exclusion. of the gross income from the forgiveness of the covered loan to an eligible recipient, ”the IRS said in a statement.
The change is widely seen as a victory for small businesses, which can use tax-free money to generate more breaks, which is generally prohibited by the tax code. Lawmakers have said allowing deductions is necessary to keep small businesses afloat amid waves of restrictions and weakening consumer spending resulting from the coronavirus pandemic.
Some businesses might pay a negative tax rate on their P3 money, which means the tax benefits exceed their loan amount. For business owners who pay the highest tax rate, this typically means they could save up to $ 37 on their taxes for every $ 100 of tax-free P3 money they receive.
The new IRS guidelines further extend the money received from the government, said Lisa Zarlenga, a partner at the law firm Steptoe & Johnson.
“The proceeds from the PPP loan are free, if forgiven, actually – so that’s a good advantage,” 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 that their intention was for businesses 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 guidelines based on intent – they needed a change in the law, so the problem went unsolved for months until. ‘to be included in the December stimulus legislation.
The delay in resolving the deductibility issue has created problems for small businesses, said Michael Greenwald, head of corporate taxation at the accounting firm Friedman. Other tax breaks – such as the 20% deduction, the R&D credit, and the new business tax credit – interact with expense write-offs, meaning companies are scrambling to determine if they can. still enjoy other tax advantages that they usually have. Claim.
“Customers were clearly relieved when Congress passed this, but the flip side was they weren’t aware of the nuances,” Greenwald said. “When we tell 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 to 2021 includes $ 284 billion in additional funding for PPP loans, which were designed to limit a wave small business failures that could cripple the economy. The plan allows some companies to apply for a second round of financing if they can post losses during the pandemic. Deductions are also allowed on second round loans.