Articles

Does Your State Tax Forgive PPP Loans? by Michael Hirsch, JD, LLM


Posted on April 12, 2021 by Michael Hirsch

The expansion of the government’s Payroll Protection Program (PPP) under recent economic stimulus packages is welcome news to nonprofits and small businesses struggling to keep their doors open and their workers employed through the prolonged COVID-19 pandemic. Yet, these entities must be careful to recognize that some of the new relief provisions of the forgivable loan program do not apply when it comes to their state income tax liabilities.

Federal and State Taxation 

Federal tax laws apply to all U.S. taxpayers regardless of where they live or where their businesses are located. States, by contrast, may conform to federal laws, or they may elect to decouple from federal regulations and impose their own separate tax regimes, which can vary significantly from one state to the next.

For example, taxpayers in 41 states currently pay individual income taxes on the federal and state level, with most local jurisdictions applying graduated rates based on individual’s specific income brackets. There are seven states that do not impose personal income taxes (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming) and two states (New Hampshire and Tennessee) that tax interest and dividends but not wages.

How States Treat Forgiven PPP Loans

The PPP, introduced by the Cares Act in March 2020, offers small businesses government-backed loans that qualify for 100 percent forgiveness when borrowers retain workers and use loan proceeds to cover payroll costs and specific operational expenses, including rent, utilities and mortgage interest. While the IRS generally requires taxpayers to treat forgiven loans as taxable income, it carved out exceptions for PPP loan recipients to 1) exclude forgiven amounts from their taxable federal gross income and/or 2) claim deduction for qualifying expenses paid for with forgiven PPP loans proceeds. This relief, however, only applies to taxes at the federal level; states have the authority to impose their own form of taxation on its residents and businesses.

As of today, April 6, 2021, 38 states and the District of Columbia have announced they will follow federal law and waive state income taxes on forgiven PPP loan amounts, and 35 states will allow deductions for expenses paid with PPP loans. However, not all states accept both forms of tax relief, and the number of states granting either form of relief is subject to change.

For example, California, Hawaii, North Carolina and Ohio will treat forgiven loans as tax-free income, but they will not extend the additional benefit of allowing a tax deduction for business expenses paid with forgiven loan proceeds. By contrast, states including Arizona, Florida, Massachusetts, Utah and Vermont will allow deductions for PPP loan expenses but will not treat forgiven loan proceeds as tax-free income.

Another challenge facing loan recipients operating in multiple states is the determination of how they should source discharged debt income resulting from forgiven PPP loans. Working with professional advisors with state and local tax (SALT) experience can help taxpayers to manage these complex issues.

About the Author: Michael Hirsch, JD, LLM, is a senior manager of Tax Services with Berkowitz Pollack Brant’s State and Local Tax (SALT) practice, where he helps individuals and businesses to meet their corporate, state and local tax reporting requirements. He can be reached at the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000 or info@bpbcpa.com.