Forgivable PPP Loans May be Taxable in Some States

Tax Reform

Businesses who received loans under the Payroll Protection Program (PPP) may be eligible to have that loan forgiven, which may result in unforeseen tax consequences. The federal Internal Revenue Code generally treats forgiven debt as taxable income; fortunately, Congress has excluded forgiven PPP loans from federal taxable income. However, as noted in a recent blog post by the Small Business Administration, that income may still be treated as taxable by your state.

The vast majority of state income tax systems conform to some degree with the federal tax code, but that does not mean all states will adopt the federal rules for forgiven PPP loans. Twenty-one states plus the District of Columbia automatically conform to the latest changes in the federal tax code. In 19 states, however, the state legislature must vote to conform to any recent changes in the federal code.

For a deeper dive into state conformity and the approaches taken by individual states, the Tax Foundation offers more background.

To avoid any unexpected tax surprises, NAHB recommends small businesses who have a forgiven PPP loan consult with their tax professional to determine if those loan proceeds will trigger a taxable event in their state. Additionally, if those loan proceeds are treated as taxable income, expenses paid out with the PPP loan may be deductible under your state code, something that is not currently permitted federally. Again, consult with your tax professional for advice.

NAHB is providing this information for general information only. This information does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind nor should it be construed as such. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers.

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