An Internal Revenue Service guidance issued on April 30 may undermine some of the benefits on the support small businesses received in the Paycheck Protection Program. It states that expenses related to the PPP’s forgivable loans, such as wages, won’t be tax deductible.

Small businesses do not have to repay the PPP’s low-interest loans as long as the money goes to essential business expenses such as payroll. Under the law creating the program, this is not counted as taxable income. In issuing its guidance, the IRS cited Section 256 of the tax code, which states that deductions can’t be taken if they are tied to a certain class of tax-exempt income, and says that expenses forgiven in the PPP loan are not tax deductible to prevent a double-dipping of Coronavirus Aid, Relief, and Economic Security Act (CARES Act) benefits.

Congress can overrule the IRS’ decision and bipartisan legislation introduced to make changes to the PPP includes language that would ensure businesses have full access to payroll tax deferment. However, whether this will be included in the text of the next large relief bill is at present unknown.