Throughout the 2020 Tax Season taxpayers and preparers questioned how PPP loans were to be reported on tax returns. The simple answer is: There is no impact on Federal Returns - within certain limitations, of course.
PPP Loans have undergone multiple revisions and amendments, leading to the latest provisions which eliminate reporting any forgiveness as income and allowing expenses to be reported as deductions on the tax return. In other words, this is a double bonus: the business reports no additional income and gets to claim a tax deduction for expenses paid with PPP funds.
However, if a business fails to meet qualifications for forgiveness, any portion that is not forgiven must be repaid. At that time, an interest rate will be assessed and any interest will be tax deductible. Until a final determination is made regarding forgiveness, the loan represents an influx of cash and a corresponding liability on the company’s balance sheet.
Note that the PPP loan itself triggers no income tax consequence. When the loan is forgiven, the business will not receive a 1099-C. If the loan is forgiven in 2021, however, the business does need to include a statement in its tax return regarding the forgiven loan.
Note: Employers who received a PPP loan cannot claim the Employee Retention Credit against their payroll withholdings.
State returns are a different scenario. Each state legislature determines their own state's tax regulations. States can either adopt Federal Regulations or vote to “de-couple” from Federal Regulations. Below is a table providing current state regulations with respect to PPP Loans.
State Tax Treatment of Forgiven First Draw PPP Loans (as of August 23, 2021):
|State||Excludes from Taxable Income||Allows Expense Deduction|
|California**||✔||Deductible for Some Businesses|
|Ohio*||✔||Deduction Allowed Under PIT (not CAT)|
|Rhode Island**||Excluded for Some Businesses||✔|
|South Dakota||No Individual or Corporate Income Tax|
|Virginia**||✔||Allows Partial Deduction|
|Wyoming||No Individual or Corporate Income Tax|
|District of Columbia||✔||✔|
*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, Texas and Washington do not. In Ohio, Nevada, and Washington, there is no deduction for business expenses, consistent with gross receipts taxation. Under Ohio’s individual income tax, forgiven PPP loans are excluded from taxable income and the expense deduction is allowed. Under Ohio’s Commercial Activity Tax (CAT), the loans are excluded from taxable gross revenue but, consistent with gross receipts taxation, the CAT does not allow a deduction for business expenses.
** Virginia excludes forgiven PPP loans from taxable income but allows only the first $100,000 in expenses paid for using forgiven PPP loans to be deducted. California conforms to the federal tax treatment of forgiven PPP loans for some but not all businesses; the state excludes forgiven PPP loans from taxation, but the expense deduction is disallowed for publicly traded companies and businesses that did not experience a 25 percent year-over-year decline in gross receipts between 2019 and 2020. Rhode Island allows an exclusion from taxable income only for forgiven PPP loans of $250,000 or less.
Sources: Tax Foundation; state tax statutes, forms, and instructions; Bloomberg BNA.
Note: This is intended to provide information regarding treatment of 2020 PPP Loans. It is not intended as tax advice.