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Are you still confused about how to treat your PPP Loan in your taxes? You’re not alone. Forgiven loans are tax-deductible on your Federal taxes, but many states are still not aligned to do the same. Depending on your state, they may be:
- Treated a taxable income;
- Denied the deduction of expenses paid for using forgiven loans;
- Or both of the above
This is due to how individual states conform to the Federal tax code.
Some states have rolling conformity with the Internal Revenue Code (IRC), meaning they automatically adopt Federal tax changes as they occur. However, some starts only adopt partial rolling conformity, and some only adopt static conformity to the legislation as it stood at a certain point in time.
The PPP Loan was unprecedented in that when Federal debt is typically forgiven, it’s still considered taxable income. Originally there was uncertainty since the language in the CARES Act did not explicitly mention the expenses paid with PPP were tax-deductible, despite guidance from the Joint Committee on Taxation. This provision only became official on December 27, 2020, when the Consolidated Appropriations Act for 2021 was signed into law.
So individual states are in one of three different positions:
- States that are adopting a version of the IRC guidelines from before the CARES Act
- States that are adopting a version of the IRC post-CARES Act but pre December 27, 2020 Update
- States with rolling conformity or who have adopted a post-December 27, 2020 version of the IRC
Some states have also adopted their provisions on PPP loan income that supersedes conformity.
So What Are The PPP Loan Forgiveness Tax Rules in My State?
The Tax Foundation compiled this handy chart to help you identify your state’s tax treatment of PPP loans (data current as of Match 25, 2021).
Even though tax deadlines are fast approaching, many states that currently tax forgiven PPP loans, including Arizona, Arkansas, Hawaii, Maine, Minnesota, New Hampshire, and Virginia, bills have been introduced to prevent such taxation.
|State||Excludes from Taxable Income||Allows Expense Deduction|
|South Dakota||No Individual or Corporate Income Tax|
|Virginia||✔||Allows Partial Deduction|
|Wyoming||No Individual or Corporate Income Tax|
|District of Columbia||✔||✔|
Notes: *Nevada, Texas, and Washington do not levy an individual income tax or a corporate income tax but do levy a GRT. Ohio imposes an individual income tax and a GRT. Texas and Nevada treat forgiven PPP loans as taxable gross revenue, while Ohio and Washington do not. In each of these states, there is no deduction for business expenses, consistent with gross receipts taxation.
**Massachusetts excludes forgiven PPP loans from taxable income under its corporate income tax, which uses rolling conformity, but not under its individual income tax, which uses pre-CARES Act static conformity.
Sources: Tax Foundation; state tax statutes, forms, and instructions; Bloomberg BNA.
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