PPP state tax treatment - chart & information (2022)
All forgiven PPP loans are excluded from federal income tax, but some states still treat forgiven loans as taxable income.
While all forgiven PPP loans are expressly excluded from federal income tax, things are not so straightforward for individual states. A handful of states – including Florida, Nevada, and Utah – still treat forgiven PPP loans as taxable income.
Others like Hawaii, North Carolina, and Washington have adopted partial PPP loan forgiveness laws. While they’ve excluded the loan from taxable income, they don’t allow deduction of business expenses paid for using these funds.
Further, in some states you’ll be required to pay income tax on your loan even though you’re not allowed to deduct expenses paid for using the loan. With tax deadlines quickly approaching, these varying practices are proving a bit confusing to small business owners who qualified for and got the Paycheck Protection Program (PPP) loan. In this article, we provide a PPP state tax treatment chart to help you understand the tax implications of the loan in your state.
Florida, Nevada and Utah are the three states that are fully taxing forgiven PPP loans. In Rhode Island, only PPP loans that exceed $250,000 are taxed. All the remaining 46 states, as well as Washington D.C., exclude forgiven PPP loans from taxable income.
Similarly, a majority of states allow small businesses to deduct expenses paid for using PPP loans. However, Hawaii, Nevada, North Carolina and Washington do not allow tax deductions on these loans. Therefore, while you may not need to report your forgiven PPP loan on taxes, you’ll still pay the tax indirectly through expenses.
California allows small business owners to deduct expenses paid for using PPP loans provided their gross receipts declined by at least 25% between 2019 and 2020. Virginia adopted a slightly different law where only the first $100,0000 of PPP loan funds are tax deductible.
Thanks to the S.B. 18 law, which came into effect on March 31, 2021, Ohio currently allows businesses to deduct expenses paid for using forgiven PPP loans. However, you can’t deduct expenses preceding this law. Therefore, any expenses that your business incurred prior to March 31, 2021 are not deductible.
Below is a table illustrating the treatment of PPP by state.
When the CARES Act was signed into law on March 27, 2020, the intention of Congress was to fully exclude forgiven PPP loans from federal taxable income. This was a direct contradiction to the Internal Revenue Code (IRC), which considers all forgiven loans taxable. So, while congress had provided the reprieve for business owners, the law was still ambiguous. Forgiven PPP loans could still be taxed under the IRC, thus contradicting Congress’s original intention.
For further clarity, Congress enacted the Consolidated Appropriations Act (2021), which came into effect on December 21, 2020. This act specifically exempted forgiven PPP loans from tax at federal level while also allowing business owners to make tax deductions on expenses paid for using forgiven PPP loans.
Typically, individual states use the IRC as a starting point for enacting state tax codes. So, even though the CARES Act and the Consolidated Appropriations Act excluded PPP loans from federal taxation, each state had the liberty to either conform to these two acts or enact its own PPP taxation laws.
While a majority of states adopted a rolling conformity over time, Florida, Nevada, Rhode Island and Utah did not. Rhode Island has a tax on forgiven PPP loans that exceed $250,000. The other three – Florida, Nevada and Utah – include the full amount of a forgiven PPP loan in taxable income.
As you may have noticed from the PPP state tax treatment chart above, these laws are specifically for forgiven PPP loans. Just about 80% of the 5 million PPP loans that were issued have been partially or fully forgiven, according to the SBA.
PPP loan forgiveness is based on eligibility. Your loan can be forgiven partially or fully if you spent at least 60% of the funds on employee payroll and the remaining 40% on business expenses. These expenses include rent, mortgage, utility, operation and interest costs.
To apply for PPP loan forgiveness, head over to the SBA’s website and download loan forgiveness Form 3508. Specifically, use Form 3508S if you qualified for a loan amount of $150,000 or less and Form 3508EZ for amounts exceeding $150,000. Alternatively, you may use an equivalent form as provided by the lender from who you got the loan.
Fill the applicable PPP loan forgiveness form and submit it to your lender. You will need to attach accompanying business documents, including your company’s legal name, employer identification number (EIN), SBA loan number, payroll schedule etc.
You’ll also need to provide additional documentation that shows how you spent the funds. These include bank statements, utility bills, copies of cancelled checks, mortgage statements, lease agreements, payroll records, and evidence that your employees were in fact kept on payroll.
The SBA may subject your business to an audit following your application for PPP loan forgiveness. Keeping all the relevant business, loan and expenditure records will help ensure that the process runs smoothly. While the loan forgiveness deadline for first draw PPP loans passed on September 27, 2021 the deadline for the second draw is January 12, 2022.
Yes, PPP loan is taxable income for employees, according to the SBA. This is because employees receive their paychecks as usual with federal taxes withheld. This is applicable even when you’re using a PPP loan to meet those payroll needs.
If you are self-employed, the forgiven amount of your PPP loan is not subject to income tax unless you’re based in Florida, Nevada or Utah. In Rhode Island, you’ll need to pay income tax if your PPP loan amount exceeded $250,000.
All the other states exclude forgiven PPP loans from taxable income. Under the Owner Compensation Replacement rule, you can use a forgiven PPP loan to pay yourself without having to pay taxes on your income and also without losing loan forgiveness. However, this rule is only applicable if you used the funds to cover business expenses for a minimum of 11 weeks.
The Owner Compensation Replacement rule uses your average monthly payroll amount to determine how much money you can borrow. That value is typically multiplied by 2.5 to find your maximum loan amount. However, you can only spend a maximum of $100,000 on payroll expenses.
The rule is mostly used for business owners whose companies have employees and use the payroll service. However, you may still apply it if you are self-employed, don’t have employees and don’t pay yourself through payroll. In which case your net profit for 2019 will be used to calculate your monthly average profit. Through the Owner Compensation Replacement rule, you can allocate an equivalent of 2.5 months of net profit to personal compensation.
That compensation is fully forgivable and you won’t have to pay it back or pay taxes on it. Furthermore, there are no restrictions on how you can spend the money.
The IRS recently provided three revenue procedures – Rev. Proc. 2021-48, Rev. Proc. 2021-49 and Rev. Proc. 2021-50 – that outline the treatment of PPP loans in tax returns. Although forgiven PPP loans are excluded from gross taxable income, they must be included in gross receipts in accordance with the Gross Receipts Test, Section 448(c).
Additionally, the revenue procedures address timing (when to report forgiven PPP loans), allocation (how partners may allocate PPP loan forgiveness) and audit (how partnerships may be subject to audit procedures).
Rev. Proc. 2021-48 addresses the timing of forgiven PPP loans. It specifically asserts that you may treat income from a forgiven PPP loan as received or accrued when:
If your business is a partnership, Rev. Proc. 2021-49 requires that the distributive share of PPP loan forgiveness follows Section 704(b). Thus, the partners’ distributive share is determined by their interest in accordance with the partnership agreement.
Finally, Rev. Proc. 2021-50 requires that BBA partnerships use Forms 1065 alongside amended Schedules K-1 for tax years after March 27, 2020. Both the 1065 and K-1 must be filled and submitted on or before December 31, 2021.