The recently enacted Coronavirus Aid, Relief and Economic Security Act (CARES Act) and Consolidated Appropriations Act, 2021 (CAA) addressed tax issues related to the delivery of a Paycheck Protection Program (PPP) loan and the deductibility of expenses associated with a rebate. PPP loan. We have discussed these matters before and several states have recently issued guidelines on how these items will be treated for state income tax purposes.
Many states have taken a “compliance” approach and follow federal tax treatment, while other states “decouple” their tax treatment from federal tax treatment and determine whether or not to follow federal tax treatment on a case-by-case basis. case. . We’ve summarized how New York, Pennsylvania, and New Jersey have handled the personal tax treatment of a canceled P3 loan.
PPP Loan Waiver – Income Exclusion
Under the CARES Act, the forgiveness of a PPP loan does not result in taxable income for federal income tax purposes and this result has not been altered by the CAA.
- New York indicated in guidelines released after the passage of the CAA that it would follow the federal tax treatment of the cancellation of PPP loans and exclude the canceled loan from New York’s adjusted gross income for income tax purposes. income of individuals in New York.
- Pennsylvania issued PPP loan forgiveness guidelines before the enactment of the CAA and said PPP loan forgiveness will result in taxable income for personal income tax purposes in Pennsylvania. As a result, Pennsylvania does not comply with federal tax treatment on income from PPP loan forgiveness.
- New Jersey has yet to pass legislation on the treatment of income from a canceled PPP loan. Legislation was proposed to the General Assembly and the Senate prior to the enactment of the CAA and this legislation states that New Jersey will comply with federal tax treatment on PPP loan forgiveness for personal income tax purposes. , that is to say, no taxable income associated with PPP loan forgiveness.
PPP loan waiver – Deductibility of expenses
The CARES Act did not specify whether expenses paid on a PPP loan could be deducted if the PPP loan was canceled, but the CAA confirmed that these expenses could be deducted.
- New York State also indicated in guidelines released after the passage of the CAA that it would also follow federal tax treatment and allow deductions for expenses paid from a canceled P3 loan.
- Pennsylvania’s expense deductibility guidelines predate the enactment of the CAA and provide that expenses related to a canceled PPP loan are deductible for personal income tax purposes. For expenses, Pennsylvania complies with the federal tax treatment of the deduction for expenses funded with the proceeds of a canceled P3 loan. Pennsylvania, in effect, cleans the income from the PPP loan cancellation from the expenses financed with the PPP loan.
- The New Jersey legislative proposal also addresses the deductibility of expenses and is consistent with federal tax treatment. New Jersey’s proposed legislation allows for the deduction of expenses funded by a canceled PPP loan for personal income tax purposes.
Many other states have addressed the issue of PPP loan cancellation while other states have yet to comment on this issue. For states that have not yet commented, the state’s general approach to federal treatment compliance or decoupling should determine how this issue will be addressed. We suggest that you discuss with your tax advisor the impact the federal treatment of P3 loan cancellation will have on you for state income tax purposes.