Certain State Tax Treatment Of PPP Loan Forgiveness And Deductibility Of Expenses
February 16, 2021
By: Robert G. Tweel, Rebecca G. M. Krehbiel, and Cassee L. Vivian
Federal Treatment of PPP Loan Forgiveness and Deductibility of Covered Expenses
One of the largest relief programs contained in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) passed March 27, 2020, was the Payroll Protection Program (“PPP”), which provided forgivable loan assistance to companies seeking to maintain their payroll during the COVID-19 pandemic. The CARES Act excludes the forgiveness of PPP loans from the federal gross income of recipient companies. While the IRS initially prohibited the deductibility of expenses paid for with PPP loan funds in IRS Notice 2020-32, Congress reversed this decision by statute in the Consolidated Appropriations Act, 2021 (“CAA”), at the end of 2020. Thus, federal law now allows covered expenses paid with PPP loan funds to be deductible for federal income tax purposes.
State Income Tax Treatment
While federal income tax treatment of PPP loan forgiveness and the deductibility of covered expenses is now clearer, state income tax treatment of these two issues is far less so. Generally, with regard to federal tax legislation, state conformity depends on whether the state automatically conforms with the latest version of the Internal Revenue Code (“IRC”), “rolling conformity”, or whether the state only conforms with a version of the IRC as of a specific date, “static conformity.” With the state income tax treatment of PPP loan forgiveness and the deductibility of covered expenses, however, the provisions of the CARES Act which address the treatment of PPP proceeds do not explicitly amend the IRC. So even in rolling conformity states, the state legislature may need to act separately to confirm whether they will adopt federal treatment of PPP loan forgiveness and expense deductibility.
Below is an explanation of the current status of state income tax treatment of PPP loan forgiveness and expense deductibility at the state level for states in which we have offices:
West Virginia is a static conformity state and is in conformity with federal definitions of income as of January 1, 2020. The West Virginia Tax Department, however, has not issued detailed guidance on how it will be treating PPP loan forgiveness or expenses. The legislative session began in West Virginia on February 10, 2021, and is scheduled to end April 10, 2021. West Virginia adopts an update bill every legislative session for personal income tax and corporate income tax, and we anticipate that this legislative session’s update will address taxation of PPP forgiveness. However, until this update is adopted, taxpayers have been directed by the WV Tax Department not to file their state returns if they are reporting PPP forgiveness. Accordingly, until these bills are passed taxpayers will have to wait to file their returns until April. This delay could prove difficult for flow-through entities whose returns are due March 15, and they will need to file extensions to appropriately wait to file their returns. These extensions will also then delay the returns of any K-1 recipients of the flow-through business.
Ohio is a static conformity state but is in conformity with the CARES Act (and other federal income tax law as it existed on March 27, 2020). Ohio has not recently issued anything specifically related to the state treatment of PPP loan proceed forgiveness or the deductibility of expenses. In June, however, the Ohio legislature adopted a law (HB 481, Section 36) which excludes PPP loan forgiveness from the definition of gross receipts for the purpose of the Ohio Commercial Activity Tax.
Pennsylvania’s state corporate income tax conforms with federal law allowing PPP loan forgiveness to be excluded from state corporate taxable income while expenses are also deductible. As of February 5, 2021, the Pennsylvania legislature’s SB 109 became law, providing the same treatment for Pennsylvania personal income tax (important for pass-through entities such as LLCs and partnerships). Thus, for state personal income tax purposes, PPP loan forgiveness is also excluded from income and deductions are allowed for expenses.
Indiana conforms to the IRC as of January 1, 2020, but the Indiana Department of Revenue has taken the position that since the provisions of the CARES Act were a part of the Small Business Administration portion of federal statute, the state will automatically follow the income tax exclusion of loan forgiveness proceeds without having to update its conformity with the IRC. The Indiana DOR takes the same position with the deductibility of expenses – that unless the Indiana legislature acts to the contrary, covered expenses paid for with PPP loans will be deductible at the state level.
The Kentucky Department of Revenue has taken the position that while the forgiveness of PPP loan proceeds are excluded from income for state income tax purposes (if they are so for federal purposes), the expenses paid with PPP loans are not deductible at the state level. A recent bill introduced in the Kentucky legislature (HB 278) would change this to allow state income tax deductibility for such expenses.
Colorado has rolling conformity with the IRC, but it is still unclear, without specific legislative action or guidance how Colorado will treat the forgiveness of PPP loan proceeds and deductibility of expenses because the federal provisions were not specifically part of the IRC. In July 2020, the State chose to de-couple from some of the more business-friendly provisions of the CARES Act (IRC Sections 163(j), 172, and 461(1)), although in January 2021, it issued guidance re-coupling with provisions over time. Clear state guidance is still necessary to clarify Colorado state income tax treatment of the PPP forgiveness and deductibility of expenses.
As the above demonstrates, reconciling state tax treatment may take time throughout the year to ensure that state treatment of PPP proceeds and expenses will mirror federal treatment (or if not, that non-conforming state tax treatment will be reported and paid correctly).