Are PPP Loan Funds Taxable? | Do You Have to Pay Taxes on Forgiven PPP? | How Will PPP Affect Taxes?

Описание: PPP loan funds are intended to be non taxable income, but there is a catch in the IRS code that may result in an unexpected tax bill.

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Unlike most canceled debts, forgiven Paycheck Protection Program loans aren’t considered taxable income at the federal level. There are some questions, however, about how the loans will be treated by various states.

Under the Cares Act, PPP loans are eligible for loan forgiveness if they are used to cover certain payroll-related cost.

Whether a forgiven PPP loan is taxed at the state and local level varies, depending on whether the state has adopted federal tax provisions set by the Cares Act. States with rolling conformity automatically adopt the federal Internal Revenue Code each time it is amended, so they wouldn’t tax forgiven PPP loans, says Ellen McCabe, managing principal at CliftonLarsenAllen, a financial advisory firm in Minneapolis.

But many states, McCabe notes, have static conformity and require specific legislation to adopt updated Internal Revenue Code. States with static, selective, or no conformity include Arizona, California, and Michigan.

Due to the pandemic, many state legislatures weren’t able to meet to conform the state tax code to the Cares Act, so “the specific provision within the Cares Act that allows for forgiveness of the loan has not been adopted,” says McCabe. In these states, it is unclear whether their tax codes will be changed in time to make forgiven PPP loans exempt from taxable income.

Unincorporated businesses in states such as Washington and Florida, which don’t have individual income tax, will also not pay taxes on forgiven PPP loans

Expenses used for PPP forgiveness cannot be deducted on a tax return, notes Chastity Wilson, managing principal at the CliftonLarsenAllen office in Orlando, Fla.

Under IRS Notice 2020-32, PPP loans amounts used for certain payroll-related costs won’t be deductible to the extent that the loan amounts are forgiven. This means that “an employer that uses wages to calculate and receive forgiveness of a PPP loan cannot deduct those same wages on its tax return,” says Wilson. Because businesses lost their tax deductions, they may pay more when they file their taxes. In some cases, it may be better for a business not to apply for a PPP loan because of the notice’s tax consequences.