Feb 12 STATE INCOME TAX TREATMENT OF PAYCHECK PROTECTION PROGRAM LOAN FORGIVENESS AND EXPENSE DEDUCTIONS
As a reaction to the economic conditions of the COVID-19 pandemic, the federal government has established a series of relief packages for businesses, including the Paycheck Protection Program (PPP). In 2020, the PPP was established to create forgivable loans for small businesses that met certain spending criteria. There are two key federal tax features of the PPP:
- Loans forgiven under the PPP will not create taxable income to the recipient (but will provide tax basis); and
- Expenses paid or accrued with PPP funds will be deductible for tax purposes.
While the PPP creates economic and tax benefits for federal tax purposes, it also poses questions for state taxing authorities. In general, states conform to the Internal Revenue Code (IRC) at a certain historic date or they conform to the IRC as of the current date (rolling conformity). Further, the states may enact specific sections of non-conformity. For example, a state may generally conform to the IRC, with the exception of bonus depreciation provisions permitted for federal tax purposes. These varying points of conformity or exceptions create opportunities for states to distance themselves from the federal programs either by default (a fixed conformity predating the program) or by specifically excepting the federal tax treatment.
The federal PPP poses new questions for state tax purposes: Do states conform to the beneficial federal treatment? Given their state fiscal postures, can they afford to be as generous as the federal government? Further, given the pandemic’s toll on the states, do they have the resources to clearly address these issues for their taxpayers?
While we await potential guidance from other state taxing authorities, taxpayers in the greater metro New York area have been provided with much needed direction:
- New Jersey: On February 9, 2021, New Jersey announced that it will follow the federal lead in its treatment of PPP funds. That is, loan forgiveness will not create taxable income to the taxpayer and expenses derived from the loans will be deductible. Further, this is applicable for both individual (Gross Income Tax) and corporate (Corporation Business Tax) taxpayers.
- Pennsylvania: On February 9, 2021, Pennsylvania issued the same guidance – e., federal conformity – for both its individual and corporate income taxpayers.
- New York: In January 2021, New York also confirmed conformation to the federal treatment for individual income tax purposes. Corporate taxpayers, as New York follows the IRC for corporate taxpayers, may abide by the federal treatment as well.
- Connecticut: Connecticut can trace its conformity to the federal PPP treatment for corporate and individual taxpayers to a letter of guidance from the Commissioner back in July 2020.
These updates should remind taxpayers and tax preparers of several issues as we approach the 2020 filing season. First, states are continuing to issue guidance on this issue. Taxpayers should be patient to see guidance from the states as it will likely continue to be issued in the coming weeks. Second, taxpayers are not always treated the same. A state may issue guidance to a corporate taxpayer but neglect to offer the same guidance to its individual taxpayers (or vice-versa). While we adapt to these changes, we should be aware that the states are enduring the same changes and are continuing to release guidance as the filing season unfolds.
For more information on state income tax treatment of Paycheck Protection Program loan forgiveness and expense deductions, please reach out to your Sax Advisor or email [email protected].
About the Author
Kevin Sohr is a State and Local Tax Specialist at Sax. He specializes in high quality tax services and planning opportunities to meet clients’ ultimate goals and objectives. He can be reached at [email protected].
