Section 276 of the CCA guarantees that the loan forgiveness amount will not be included in taxable income for any borrower under a PPP loan and states that deductions relating to loan forgiveness will be allowed and that the borrower’s tax basis and other attributes will not be reduced as a result of loan forgiveness.
It should be noted that the federal tax treatment of PPP income and expenses does not necessarily apply for state income tax purposes. In the absence of specific guidance from states, existing state law governs.
Each state that implements an income tax has its own revenue code that conforms to some extent to the Internal Revenue Code. Some states, approximately 21, use rolling conformity, meaning they automatically conform to the most current Internal Revenue Code (IRC) for both individual and corporate income taxes, but it is not a guarantee. New York has issued formal guidance on their website in regards to the state’s treatment of the Paycheck Payment Program (“PPP”) for personal income tax purposes.
Some states, approximately 19, are static conformity states, meaning that state lawmakers must vote to change their state’s conformity date. Static conformity states, unless they have passed legislation to conform to the most recent version of the IRC or the provisions of the CARES Act, may not follow the federal income tax treatment of PPP income and expenses.
Lastly, some states use selective conformity, adopting only certain IRC provisions or certain provisions as of a specific date, or they make certain material changes to key provisions.
New York State has clarified that it will follow the federal treatment of the PPP. If the forgiven loan is excluded from federal adjusted gross income it is also excluded from New York adjusted gross income. Similarly, if the expenses related to the forgiven loan are deducted in computing federal adjusted gross income, these deductions are automatically excluded from New York adjusted gross income. New York has not yet issued guidance on the State’s conformity to the tax treatment of PPP forgiveness for corporate taxpayers, but we anticipate that the Department will issue such guidance shortly. New Jersey is a state that does not conform to the IRC on a rolling basis and has not issued direct guidance currently. However, New Jersey has proposed Assembly Bill 5149 which would conform to federal treatment of PPP.
Withum is currently working to determine the state income tax treatment of PPP loan proceeds and related expenses. Stay tuned and visit our Stimulus Package Headquarters for updates and other informative articles.