The Coronavirus Aid, Relief and Economic Security Act (CARES Act) and the recently passed Consolidated Appropriations Act, 2021 (CAA) addressed tax issues related to the granting of a Paycheck Protection Program (PPP) loan and expense-deductibility-related issues with a forgiveness PPP loan. We have already discussed these issues and several states have recently issued guidance on how these items are treated for state income tax purposes.
Many federal states have chosen a “conformity” approach and follow federal income tax treatment, while other federal states “decouple” their income tax treatment from federal income tax treatment and decide on a case-by-case basis whether or not to follow federal income tax treatment. We’ve summarized how New York, Pennsylvania, and New Jersey approached the personal income tax treatment of an in-place PPP loan.
PPP lending – exclusion from income
Under the CARES Act, the issuance of a PPP loan does not result in taxable income for federal income tax purposes, and that outcome has not been changed by the CAA.
- New York stated in guidance issued after the CAA went into effect that it will follow federal income tax treatment of PPP loan lending and exclude the loan made from New York adjusted gross income for New York personal income tax purposes.
- Pennsylvania issued guidelines on PPP loan issuance prior to the CAA going into effect, stating that PPP loan issuance will result in taxable income for personal income tax purposes in Pennsylvania. As a result, Pennsylvania does not comply with federal tax treatment for the income from the issuance of PPP loans.
- New Jersey has not yet enacted any legislation regarding the treatment of income from a PPP loan made. The legislation was proposed in the General Assembly and Senate prior to the CAA going into effect, and that legislation states that New Jersey will comply with federal income tax treatment for the issuance of PPP loans for personal income tax purposes, that is, no taxable income related to the Forgiveness of the PPP loan.
PPP Loan Forgiveness-Expense Deductibility
The CARES Act did not address the issue of whether expenses could be deducted from a PPP loan if the PPP loan were granted, but the CAA confirmed that such expenses could be deducted.
- New York State also advised in guidance issued after the CAA went into effect that it will also follow federal income tax treatment and allow deductions for expenses from a PPP loan made.
- Pennsylvania’s expense deductibility guidelines date back to the passage of the CAA and provide that expenses related to a PPP loan made are deductible for personal income tax purposes. In the case of expenses, Pennsylvania complies with federal income tax treatment for the deduction of expenses funded with the proceeds of a PPP loan made. In fact, Pennsylvania is offsetting the proceeds from the PPP loan against the expenses funded by the PPP loan.
- The New Jersey legislative proposal also addresses expense deductibility and is consistent with federal income tax treatment. New Jersey proposed legislation allows for income tax purposes to be deducted from expenses funded by a PPP loan made.
Many other states have addressed the issue of PPP lending while other states have not yet commented on the issue. For those states that have not yet commented, the state’s overall approach to compliance or decoupling from federal treatment should determine how to deal with this issue. We encourage you to speak with your tax advisor about how the federal government’s treatment of PPP loan issuance will affect you for state income tax purposes.[View source.]