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Some PPP Loan Recipients Will Struggle With State Tax Codes

6 min read • May 11, 2020 • Ben Glaser

When Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act and funded the Paycheck Protection Program, it provided for forgivable loans to small and struggling businesses affected by the novel coronavirus pandemic. The legislation went one step further, though, and specified that forgiven loans would be tax-deductible.

Forgiven PPP Loans Are Still Tax-Deductible for Federal Income Tax

This is good news for recipients of the loans. If approved, businesses may not have to pay back their loans. Such businesses would have to apply for loan forgiveness and meet certain conditions, including spending all of the loan on payroll, rent/mortgage, and utilities within 8 weeks of receipt (with at least 75% going to payroll), and maintaining staff levels. Under normal circumstances, a forgiven loan is still taxable income—if a business is basically getting free money to grow, the government still takes its cut.

However, these are not normal circumstances. Businesses are not getting these loans to grow but to survive. If the forgiven loans are taxed, “the whole purpose of encouraging the maintenance of full employment would be lost,” said CPA Harvey Bezozi to Bloomberg Tax

For this reason, the CARES Act explicitly says that the forgiven loans are deductible income for the purposes of federal taxes, in effect making them non-taxable federal grants.

Conformity With The Internal Revenue Code

The problem then is state taxes. State tax codes may still say that this income is nondeductible, and therefore will be taxed.

States do not have to have the same tax code as the federal government. Federal tax laws are known as the Internal Revenue Code (IRC). And when a state matches its tax code to the federal tax code, it is known as “conformity.” But if, how, and when states do this varies greatly.

The States With No Income Tax

Nevada and Wyoming don’t have individual or corporate income tax, or gross receipts tax (another form of corporate tax). So if you operate your business in one of these states, your forgiven PPP loan won’t be taxed anyway.

In addition to those 2 states, 7 other states have no individual income tax. So if you operate your small business in one of these states and your business is not incorporated (i.e., your business income is taxed like personal income), you likely will not have to pay tax on your forgiven PPP loan:

  • Alaska
  • Florida
  • Nevada
  • New Hampshire
  • Tennessee
  • Texas
  • Washington

States With Rolling Conformity to the Internal Revenue Code

The following states have rolling conformity with the federal tax code. That means that the state’s tax code is automatically updated to match changes in the federal tax code. In these states, your forgiven PPP loan is already tax-deductible:

  • Alabama
  • Colorado
  • Connecticut
  • Delaware
  • Illinois
  • Kansas
  • Louisiana
  • Maryland
  • Missouri
  • Montana
  • Nebraska
  • New Mexico
  • New York
  • North Dakota
  • Oklahoma
  • Rhode Island
  • Utah
  • Washington, DC

States with Static, Selective, or No Conformity

In the remaining states, it’s unclear if state tax codes will be changed in time to exempt the forgiven PPP loans from taxable income. States with static conformity tie their state tax code to the IRC, but on a specific date in the past, like January 1 of the previous year (and some states have not updated this date in over a decade). These states would need to conform their tax code to a date after the passage of the CARES Act. States with no conformity have to update the tax code through legislation—and due to the pandemic, many state legislatures are not meeting regularly. States with static, selective, or no conformity are:

  • Arizona
  • Arkansas
  • California
  • Georgia
  • Hawaii
  • Idaho
  • Indiana
  • Iowa
  • Kentucky
  • Maine
  • Massachusetts*
  • Michigan
  • Minnesota
  • Mississippi
  • New Jersey
  • North Carolina
  • Ohio
  • Oregon
  • Pennsylvania**
  • South Carolina
  • Vermont
  • Virginia
  • West Virginia
  • Wisconsin

*Massachusetts has rolling conformity for its corporate income tax and static conformity for individual income tax.

**Pennsylvania has rolling conformity for its corporate income tax and selective conformity for individual income tax.

If you live in one of these states, monitor the news closely for information about the tax code. If there are no updates, contact your elected officials and remind them how important it is for small businesses to receive guidance on the subject.

State Taxability of PPP Loan Forgiveness Is Unknown for Many

Without further action, the taxability of PPP loan forgiveness is a big question mark in many states and will likely remain so through the next tax season. States may not even want to tax these loans, but the quirks of the tax code mean it will happen if nothing is done to change it—and the pandemic is making it difficult for state legislatures to do anything right now, including updating tax codes. Unfortunately, all that loan recipients in those states can do is wait, stay informed, and lobby for guidance.

 

While every effort is made to ensure the accuracy of information when a story is published, the coronavirus pandemic and Paycheck Protection Program (PPP) have caused details to change at a rapid pace. Additional guidance from the government may change or clarify certain aspects of the forgiveness process and could result in changes to the information contained in these pages. For the most up-to-date information, please visit the COVID-19 section of our website. For more information, you can call us at (855) 853-6346. Lendio is not responsible for and provides no warranty as to the accuracy of this content. Lendio does not provide legal, accounting or tax advice. The information and services Lendio provides should not be deemed a substitute for the advice of such professionals who can better address your specific concern and situation.

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Ben Glaser

Ben has almost a decade of experience covering personal finance and business. From 2014–2017, he was blog editor and spokesperson for the shopping website DealNews.com, where he regularly appeared on programs like Good Morning America and Fox and Friends to offer consumer advice. Ben graduated from Harvard with a BA in English and lives in the Hudson Valley of New York.