States Clarify Personal Income Tax Treatment Related To PPP Loan Forgiveness
The Coronavirus Aid, Relief and Economic Security Act (CARES Act) and the recently enacted Consolidated Appropriations Act, 2021 (CAA) addressed tax issues related to the forgiveness of a Paycheck Protection Program (PPP) loan and the deductibility of expenses associated with a forgiven PPP loan. We previously discussed these issues and several states have recently issued guidance on how these items will be treated for state personal income tax purposes.
Many states have adopted a “conformity” approach and follow federal income tax treatment while other states “uncouple” their income tax treatment from federal income tax treatment and determine whether to follow or not to follow the federal income tax treatment on a case by case basis. We summarized how New York, Pennsylvania and New Jersey have addressed the personal income tax treatment of a forgiven PPP loan.
PPP Loan Forgiveness-Exclusion from Income
Under the CARES Act, the forgiveness of a PPP loan does not result in taxable income for federal income tax purposes and this result was not changed by the CAA.
- New York has indicated in guidance issued after the CAA was enacted that it will follow the federal income tax treatment of PPP loan forgiveness and will exclude the forgiven loan from New York adjusted gross income for New York personal income tax purposes.
- Pennsylvania issued guidance on PPP loan forgiveness before the enactment of the CAA and stated that PPP loan forgiveness will result in taxable income for Pennsylvania personal income tax purposes. As a result, Pennsylvania is not conforming to the federal income tax treatment on the income from PPP loan forgiveness.
- New Jersey has not yet adopted legislation on the treatment of income from a forgiven PPP loan. Legislation was proposed in the General Assembly and the Senate prior to the enactment of the CAA and this legislation states that New Jersey will conform to the federal income tax treatment on the PPP loan forgiveness for personal income tax purposes, i.e., no taxable income associated with the PPP loan forgiveness.
PPP Loan Forgiveness-Expense Deductibility
The CARES Act did not address whether expenses paid from a PPP loan could be deducted if the PPP loan was forgiven, but the CAA confirmed that such expenses could be deducted.
- New York State has also indicated in guidance issued after the CAA was enacted that it will also follow the federal income tax treatment and allow deductions for expenses paid from a forgiven PPP loan.
- Pennsylvania’s guidance on expense deductibility predates the enactment of the CAA and provides that expenses related to a forgiven PPP loan are deductible for personal income tax purposes. In the case of expenses, Pennsylvania is conforming to the federal income tax treatment of the deduction for expenses funded with the proceeds of a forgiven PPP loan. Pennsylvania, in effect, nets the income from the PPP loan forgiveness against the expenses funded with the PPP loan.
- New Jersey’s legislative proposal also addresses the deductibility of expenses and conforms to the federal income tax treatment. New Jersey’s proposed legislation allows, for personal income tax purposes, the deduction of expenses funded by a forgiven PPP loan.
Many other states have addressed the PPP loan forgiveness issue while other states have not yet commented on this issue. For those states that have not yet commented, the general approach of the state in terms of conformity or uncoupling from the federal treatment should determine how this issue will be handled. We suggest that you talk with your tax advisor about how the federal treatment of PPP loan forgiveness will impact you for state personal income tax purposes.
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