With nearly 700,000 businesses having applied for the Paycheck Protection Program (PPP), many are unaware that the forgiven portion of the loan for Federal purposes may actually be taxable as gross income in some states.
Will Federally Forgiven PPP Debt be Taxable by States?
The answer to the questions is possibly. Under normal circumstances, cancellation of debt would be includable in your gross income. An example would be if you and your credit card company discussed your balance, and the credit card company forgave a portion of your balance due. The balance of the forgiven portion would then be included as income. Businesses that meet the qualifications for their PPP loans to be fully or partially forgiven at the Federal level will need to determine if the states they have nexus in will follow the Federal guidelines.
Will Expenses Paid with PPP Funds Be Deductible?
In the normal course of business, ordinary and necessary expenses are deductible. However, if you received a loan to pay your expenses, and then the debt was forgiven and not taxed, did you pay those expenses? The IRS believes that expenses paid with forgiven funds should not be deductible from a company’s gross income. The exclusion of forgiven expenses in calculating taxable income will increase the company’s tax liability and the amount due to the IRS. Ruling for this topic is not final, although some states have issued guidance.
Disagreement Among States
Each state has the power to regulate the laws within their respective state borders. There are twenty-one rolling conformity states, which means they conform with the Internal Revenue Code (IRC) whenever there are changes. Nineteen states are static conformity. This means their tax laws are based on the IRC as of a specific date. As new federal tax laws are enacted, their legislative body must vote to either adopt any federal changes or change their state’s IRC conformity date. These static conformity states may operate under the pre-TCJA code (Tax Cuts & Jobs Act) due to their outdated conformity of the IRC. The other states either do not have an income tax or have selective conformity between individual and corporate taxation. Significant tax issues may arise for businesses that operate or have nexus in multiple state jurisdictions.
If you have any questions regarding federal PPP loan forgiveness and how it could affect your business, please reach out to us via email, give us a call at (401) 921-2000, or fill out our online contact us form. For further information regarding COVID-19 assistance programs, please visit our COVID-19 Resources page.