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IRS announcement on tax deductions for wages

The IRS announced late Thursday that it won’t allow companies to take tax deductions for the wages and other expenses associated with forgiven Paycheck Protection Program loans.

The IRS ruling clarified an ambiguity in the Paycheck Protection Program, but also shrinks the value of the program for employers.

“This treatment prevents a double tax benefit,” the IRS said in its notice. Normally, wages are deductible expenses and forgiven debt is taxable income. But the economic-relief law included a special provision that declared this forgiven debt not to be taxable income. Since the law is silent on the question of whether normal deductions are allowed, tax experts had asked the IRS to clarify how the law works.

To deny the deductions, the IRS invoked Section 265 of the tax code, which says that deductions can’t be taken if they are tied to a specific class of tax-exempt income.

Absent a directive by the President to reverse the IRS’s decision, Congress could pass a law specifically allowing the deductions. It has done that in similar cases.

If you have any questions about PPP loans and this development, reach out to us at 303-989-7600.