States Could Tax PPP Funds

September 30, 2020

The tax treatment of Paycheck Protection Program (PPP) loans continues to be a major issue for those businesses who received the loans. In addition to preventing deductibility on forgiven PPP expenses, some states are now entering the fray and saying they plan to tax forgiven PPP funds.

The original intent of Congress in passing the CARES Act which implemented the PPP was to allow forgiven PPP expenses to be deductible as ordinary expenses. Although IRS is exempting forgiven PPP funds from federal income taxes, they are NOT allowing those PPP fund expenses to be deductible as a business expense. The result: a reduction in the actual amount of aid offered to small businesses through the PPP.

The U.S. Small Business Administration (SBA) Office of Advocacy recently highlighted another tax issue facing PPP recipients:  state taxes on forgiven PPP funds. According to Advocacy:

“Twenty-one states and the District of Columbia are rolling conformity states, meaning they automatically conform to the most current IRC for both individual and corporate income taxes. Taxpayers with forgiven PPP loans in those jurisdictions will exclude the forgiven loan proceeds from taxable income at the federal and state level. Nineteen states are static conformity states, meaning that state lawmakers must vote to change their state’s conformity date. … A Tax Foundation survey has projected that state revenues could be down $121 billion over the next two years. Because of the pandemic, states are hurting for revenue and may have no plans to update their conformity dates to rectify this glitch. Indeed, California has already stated that it plans to tax forgiven PPP loan proceeds.”

Unfortunately, efforts to tax PPP forgiven funds not only serve as an unwelcome surprise to loan recipients, they essentially take away money designed to help small businesses when it is needed most. Small businesses need assistance, support and time, and while states are certainly facing critical shortages, taxing businesses that are barely holding on is short sighted and could result in even greater business closures.

Click here to read NSBA’s letter to Congress urging additional small-business relief.