The Paycheck Protection Program (PPP), was created as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act and authorized loans to qualifying businesses affected by the COVID-19 pandemic. Businesses are permitted to use their PPP loans for certain qualified business expenses and are afforded partial or total forgiveness up to these amounts, so long as the other PPP Loan provisions are met. Specifically, CARES Act Section 1106(i) explicitly excludes the forgiveness of PPP loans from gross income on a federal level. The Consolidated Appropriations Act, 2021 goes on further to state that deductions shall not be denied, meaning that expenses paid with forgiven loan proceeds are tax-deductible for federal income tax purposes.
For the states, however, there is not an automatic adaptation of this provision depending on how that state has chosen to adopt the Internal Revenue Code (“IRC”). To fully conform with the nontaxable PPP Loan Forgiveness, a state must adopt the most current IRC as well as conform to the CARES Act provisions. States typically fall into several buckets of conformity: rolling conformity, static conformity, or selective conformity.
- Rolling Conformity: States with rolling conformity will adopt the most recent IRC as it becomes available.
- Static Conformity: States with static conformity will adopt the IRC on the date on which they have chosen and new adoption dates must be set by the state regularly as the IRC is updated.
- Selective Conformity: States with selective conformity pick and choose the provisions that they will adopt at the state level. These adaptation policies have had a significant impact on state tax matters following the CARES Act and could cause significant income tax adjustments for taxpayers at the state level regarding PPP Loan forgiveness.
Twenty-one states and the District of Columbia are states that implement rolling conformity, meaning they automatically have conformed to the CARES Act and all subsequent IRC provisions, adopting the most up to date version. Taxpayers with forgiven PPP loans in those jurisdictions will most likely exclude the forgiven loan proceeds from taxable income at the federal and state-level unless the state has specifically adopted their own provision creating an add-back for PPP forgiveness or other income adjustments. It is important to note that while the CARES Act modified what is included in gross income, i.e., forgiven PPP loans proceeds, there is no specific IRC provision that was created, which means of the nineteen states that follow static conformity, those state lawmakers must vote to change their state’s conformity date to include the CARES Act.
For Static conformity states, unless they have updated their date of conformity to the most recent IRC or date of the CARES Act, these states would not be in conformity with the PPP forgiveness provisions, and PPP loan forgiveness may not be exempt from gross income for that state. This is also dependent upon whether a state has a federal adjusted gross income or taxable income starting point in calculating that state’s taxable income. This means that states not only have to ensure that they have adopted the most recent IRC and conform to the CARES Act provisions, but they have ensured their state starting point for calculating taxable income accurately includes or excludes PPP loan forgiveness. This may require some states to update forms, worksheets and/or instructions to affirmatively income or exclude PPP loan forgiveness from their taxable income calculation.
States Impacting Many of our Clients:
Many of our clients are concentrated in Ohio, New Jersey, Florida and Pennsylvania, and each of these states has differing conformity issues. The following provides a state-by-state breakdown of the current status of PPP Loan forgiveness as it relates to state income tax.
The state of Ohio has affirmatively stated that for CAT purposes PPP forgiveness will not be subject to taxation, which was a critical addition to the law as the Ohio CAT calculation typically includes debt forgiveness. However, it should be noted that the Ohio Department of Taxation has recently issued guidance that this relief does not extend to Economic Injury Disaster Loan (EIDL) advance grants and other county-issued relief grants.
For income tax purposes, the state of Ohio has conformed with the most up to date IRC as well as the CARES Act. While the state of Ohio has not affirmatively stated whether or not they will have any specific modifications relating to PPP, it can be assumed that Ohio will follow the federal code for income tax purposes unless another guidance is released.
On February 9, 2021, New Jersey Governor Phil Murphy and State Treasurer Elizabeth Maher Muoio announced that New Jersey will follow the federal treatment and that PPP loan forgiveness will be tax exempt at the state level. In addition, the related business expenses that were paid with the loan proceeds will be deductible.
They have stated “New Jersey can follow the federal government’s treatment without enabling legislation under existing authority.” Therefore, related expenses paid for with PPP loans will be deductible for both Gross Income Tax (“GIT”) and Corporation Business Tax (“CBT”) purposes and forgiven loans will be excluded from being subject to either tax.
In Pennsylvania, PPP forgiveness is exempt for sole proprietors, partnerships, and S Corporations under Act 1 of 2021. The Act also states that the related expenses are deductible in calculating taxable income. Pennsylvania C Corporations follow federal rules.
The state of New York has recently announced its intent to conform to the federal rules against taxing PPP loan forgiveness. At this time New York has not formally confirmed, and we will be awaiting additional information from the state.
Florida will follow the federal rules for C Corporations.
Florida does not have an income tax for individuals.