This article appeared in the March 2021 issue of MiMfg Magazine. Read the full issue and find past issues online.
In the wake of the pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 have provided immediate assistance to the American workforce. While these bills have delivered direct economic assistance to small businesses nationwide, some business owners have been left perplexed regarding the tax deductibility of their Paycheck Protection Program (PPP) or PPP2 loans.
What We Know
It cannot and should not be assumed that states will adhere to the federal tax treatment of forgiven PPP loans and the deductibility of expenses related to those loans. Existing state laws dictate — whether by formal legislation or informal guidance — when specific CARES Act and coronavirus-related Tax Relief Act guidance do not exist.
A lack of conformity among states increases compliance costs and time, especially for taxpayers filing in multiple states. Each state with an income tax has its own tax code that conforms and decouples to varying degrees from the Internal Revenue Code (IRC). Most states have not announced how they will or will not conform to the federal treatment. With projected revenue shortages, states may take affirmative steps to tax forgiven PPP loans.
What We Don’t Know
At this time, twenty-one states — including Michigan — and the District of Columbia conform to the current IRC for both individual and corporate income taxes. It is anticipated these states will adopt the federal income tax treatment, but it is not guaranteed. These states could pass legislation decoupling from the federal treatment. Likewise, a state could make the argument it only conforms to the definition of gross income as expressly defined in the IRC. As many will recall, the CARES Act modified what is included in gross income but the act did not specifically amend the definition of gross income.
The remaining states have static or a specific date of conformity to the IRC. If they want to conform to the federal treatment, these states will have to pass specific legislation to do so. If they do not want to conform, there will likely be no immediate action item. In this instance, the state’s existing laws render the forgiven loans as taxable income.
Taxpayers will have to carefully research and analyze each state to determine how its conformity or decoupling impacts the income tax calculation and liability. Be prepared to invest more time in state compliance than in previous years.
How to Prepare
It is unclear when states will begin announcing whether they are or are not going to issue guidance regarding PPP loan forgiveness.
Tax preparers should keep contemporaneous notes on the approach taken in each state. In the instance the state raises questions about your return, be prepared to answer accordingly and have research on file to avoid rebuilding arguments.
Start by having crucial conversations with a business advisor now, visit state websites for tax resource tools and plan to check for updates regularly. In any case, prepare for the long-haul when it comes to this year’s taxes, and consider an extension to allow time for states to issue guidance.
Rehmann is an MMA Premium Associate Member and has been an MMA member company since July 2006. Visit online: rehmann.com.
About the Authors
As Rehmann’s director of state and local tax (SALT), Lisa focuses on identifying tax savings and resolving multi-state tax issues for domestic and international clients alike. She performs SALT planning, consulting, audit defense and dispute resolution for all entity types and individuals to minimize tax and manage risk. She may be reached at 616-975-2869 or firstname.lastname@example.org.