(March 26, 2021) - In determining their taxable income for federal income tax purposes, borrowers of Payroll Protection Program (PPP) loans now can deduct qualifying business expenses they paid with forgiven PPP loan proceeds. See Consolidated Appropriations Act, 2021 (P.L. 116-260) (CRA, 2021, Secs. 276 and 278). The new law provides that no deduction is denied, no tax attribute is reduced, and no basis increase is denied because of the exclusion from income of the recipient's forgiven PPP loan. The change is effective for tax years ending after March 27, 2020 (tax year 2020 for calendar year taxpayers). See Rev. Rul. 2021-02.
For federal income tax purposes, PPP loans now provide a double benefit: borrowers can exclude from gross income the amounts of a PPP loan used to make qualifying expenditures, and those expenditures are tax-deductible.
State Response and Trends
Most states have enacted their own laws to conform to the exclusion from federal gross income of forgiven PPP loans. Arizona, Florida, Idaho, Massachusetts, Minnesota, South Dakota, Nevada, New Hampshire, Texas, Utah, Vermont, and Wyoming are exceptions and do not exclude forgiven PPP loans from gross income. Note that several of these states do not levy an individual or corporate income tax.
More recently, states have been amending their tax laws to allow deductions for expenses paid with proceeds from forgiven PPP loans. For example, on March 17, 2021, Maine L.D. 220 was signed into law, conforming to the federal exclusion from gross income of forgiven PPP loans and the deductibility for expenses paid with forgiven PPP loan proceeds. On March 15, 2021, Kentucky House Bill 278 was signed into law which, effective immediately, allows the deduction of expenses paid with proceeds of forgiven PPP loans. The Kentucky law applies to deductions attributed to the proceeds of forgiven PPP loans for tax years ending on or after March 27, 2020, but before January 1, 2022. To date California, Hawaii, North Carolina, Ohio, Texas, and Washington do not allow for the deductibility of expenses paid with proceeds of forgiven PPP loans. Virginia allows for a partial deduction for expenses paid with proceeds of forgiven PPP loans.
What This Means
Deadlines for filing annual income tax returns are fast approaching, but many states' forms and instructions have already been published and do not describe the newly available deductions. States that have recently enacted laws allowing for the deductibility of expenses paid with forgiven PPP loan proceeds will need to modify their income tax instructions, software, and forms to accommodate these changes.
Taxpayers should consider these legislative changes in preparing their state income tax returns. Taxpayers who have already filed state income tax returns should consider whether to file amended returns in order to claim these new deductions for expenses that were previously not allowed for state income tax purposes. Similarly, borrowers of PPP loans should consider whether to amend any relevant federal income tax returns on which the borrower either has not excluded forgiven PPP loan proceeds from gross income or deducted business expenses paid with forgiven PPP loan proceeds.
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