State Tax Conformity of PPP Loan Forgiveness and Related Expense Deductions

The Paycheck Protection Program (PPP) was one of the most impactful provisions included under the Coronavirus Aid, Relief and Economic Security (CARES) Act. As part of the CARES act, Congress mandated that any PPP loan forgiveness amounts should not be considered taxable income for federal income tax purposes. Additionally, with the enactment of the Consolidated Appropriations Act (CAA) on December 27, 2020, Congress made clear its intent to also provide a deduction for expenses paid with PPP loans, whether or not the loans were forgiven. 

While the treatment of the forgiven PPP loans may be clear for federal income tax purposes, the state treatment of the forgiven loan amounts and related expense deductions are still evolving. There are multiple states that have provided specific guidance indicating whether or not they will conform to the federal treatment of the forgiven PPP loans. Several states have also issued specific guidance that they will not allow deductions for expenses paid with PPP forgiven loan proceeds. As the CAA was more recently enacted, many states are still analyzing the impact the federal deductions will have on state revenue and further state guidance on the issue is expected.

State legislators are considering legislation related to the taxability/ deductibility of PPP items. In Texas, for example, lawmakers are considering SB 372 (HB 1195), which would follow the Federal tax treatment of both PPP loan forgiveness and expense deductibility. Absent the legislation passing, taxpayers face the prospect of including the forgiven loan amounts as revenue subject to the franchise tax and not being able to deduct certain expenses paid if those expenses do not qualify for the Texas Cost of Goods Sold (COGS) or Compensation deduction.  

As of the date of this article:

The following states have issued conformity guidance in line with the Federal treatment of excluding forgiven PPP loans from qualifying as taxable income as well as allowing deductions for expenses paid with forgiven loan proceeds: Alabama, Arkansas, Colorado, Connecticut, Georgia, Idaho, Illinois, Indiana, Iowa,  Kentucky, Maine, Massachusetts, Mississippi, Montana, Nebraska, New Jersey, New Mexico, New York, Oregon, Pennsylvania, South Carolina, Tennessee, Virginia (limited expense deductibility), West Virginia and Wisconsin.

The following states have provided guidance that they will conform to the federal treatment of the forgiven PPP loans not being taxable income, but have either provided guidance that expenses paid with forgiven PPP loans are not deductible or have not provided specific guidance: California (expenses not deductible), District of Columbia, Hawaii (expenses not deductible), Louisiana, Maryland and North Carolina (expenses not deductible) and Ohio.

States that have provided guidance that they will not conform to the federal treatment and will include the forgiven PPP loans in taxable income are:  Massachusetts (individuals) (expenses deductible), Minnesota (expenses deductible), New Hampshire (expenses deductible), Texas (expenses deductible) and Utah (no guidance on expense deductibility).

Alaska, Arizona, Delaware, Florida, Mississippi, Missouri,  North Dakota, Oklahoma, Rhode Island, and Vermont have not issued any guidance to date.

In the absence of specific guidance, to determine whether a state will likely conform to the federal treatment of PPP loan forgiveness and expense deductibility, a taxpayer may follow whether or not a state currently conforms to the most recent version of the Internal Revenue Code (IRC). States generally conform to the IRC by adopting either rolling conformity (always conforming to the most recent version of the IRC), a fixed date conformity (conforming to the IRC as of a specific date) or selective conformity (specific code sections are conformed to as of a specific date). Currently, 21 states and the District of Columbia have rolling conformity statutes.

The implication as it relates to the federal treatment of PPP loans and expense deductibility is that states with rolling conformity will respect the federal treatment as long as legislation is not passed that would decouple from the current version of the IRC. For the states that do not have rolling conformity, the implication is that they will not follow the federal treatment unless the states provide specific guidance stating that they will follow the federal treatment or pass legislation that updates their IRC conformity to the current version of the IRC. 

With many state legislatures in session, state treatment of the PPP loan forgiveness and the treatment of expense deductions from PPP loan proceeds continues to develop. Many states have enacted legislation to conform to the federal income tax treatment, while others are considering similar tax legislation. For states with rolling conformity there is still the possibility of specifically decoupling from the IRC or providing specific guidance that they will not follow the federal treatment.

As tax returns for 2020 are becoming due, taxpayers should continue to monitor updates as additional states are issuing guidance on a daily basis.

For more information on state tax conformity of PPP loan forgiveness, contact us. We’re here to help.

This information has been updated as of March 18, 2021.

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