State Tax Treatment of Forgiven PPP Loans

For purposes of federal income taxation, existing federal law excludes from gross income any amounts of loans made pursuant to the Paycheck Protection Program that are forgiven. This is great news for borrowers, to be sure. But the question remains: how do the states treat forgiven PPP loans?

Last year, Michelman & Robinson, LLP reported on Governor Gavin Newsom’s signing Assembly Bill 1577 into law, which amended California’s tax code as it relates to loan forgiveness under the PPP. Pursuant to AB 1577, sections 17131.9 and 24308.6 were added to the California Revenue and Taxation Code, which serve to exclude from gross income any covered loan amount forgiven pursuant to the CARES Act, the PPP and Health Care Enhancement Act, or the PPP Flexibility Act of 2020.

Less favorable to California borrowers is additional language in AB 1577 that denies business expense deductions for expenses paid using forgiven PPP loan funds, though this was consistent with the federal law when AB 1577 was enacted (more on this in a moment).

By way of this alert, Michelman & Robinson, LLP goes beyond California, and in the table below, we set forth the tax treatment of the other states that have weighed in on PPP loan forgiveness.

Of note, the PPP was designed to be a tax-free safety net for small businesses on the brink due to the COVID-19 pandemic, at least on the federal level. Nonetheless, at first the tax benefit was in many ways all for naught because of a U.S. Treasury Department ruling that expenses paid with PPP loans were not deductible under the law (at least as it was written at the time). Thereafter, in December 2020, the Consolidated Appropriations Act for 2021 was signed, and with it, PPP-related expense deductions were (and now are) permitted.

As can be seen in the table above, while many states entirely conform to the current federal law tax treatment of forgiven PPP loans, others do not (especially in terms of the deduction of expenses associated with the PPP). In the case of states that do not exclude forgiven PPP loans from taxable income or otherwise disallow the expense deduction, PPP recipients in those places are not receiving the full emergency benefit Congress intended. This, however, is subject to change given pending legislation in several states to prevent an adverse tax impact upon PPP borrowers.

The attorneys in Michelman & Robinson, LLP’s COVID-19 Practice Group will continue to track the tax implications of the PPP upon businesses throughout the country. In the meantime, do not hesitate to contact us with questions you may have about these issues.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.