CLIENT ALERT
By: Peter Beach
June 17, 2020
Borrowers who obtained funds under the CARES Act’s Paycheck Protection Program (the “PPP”) generally anticipated that the portion of a PPP loan that was forgiven would not be subject to either federal or state tax. In the case of federal tax, tax-free forgiveness is not in question, although PPP loan borrowers’ expectations may have been effectively undone by IRS Notice 2020-32, which disallows the deduction of any expenses that result in forgiveness of a PPP loan. In addition, many states are not following the federal tax treatment of PPP loan forgiveness and the deduction of related expenses.
New Hampshire. Under the NH business profits tax (the “BPT”), cancellation of debt income is generally taxable or not depending on its treatment for federal income tax purposes. However, as of the date of this Alert, the New Hampshire Department of Revenue Administration (the “DRA”) has taken the position in discussions with tax practitioners that the forgiveness of PPP loans will be subject to tax under the BPT.[1] The basis for the position is that for tax years beginning on or after January 1, 2020 (the year in which PPP loan forgiveness will occur), the BPT looks to the Internal Revenue Code (the “Code”) in effect on December 31, 2018, at which time there was no exclusion under the Code for income from PPP loan forgiveness. Also, as of the date of this Alert, we are not aware of the position that the DRA intends to take with respect to the deductibility of expenses paid for with proceeds from the forgiven portion of a PPP loan. However, it would be reasonable to expect that because the loan forgiveness would be taxable under the BPT the deductions would not be disallowed.
Massachusetts. The Massachusetts Department of Revenue (the “DOR”) has taken different positions for personal income tax and corporate excise tax purposes in its Working Draft TIR 20-XX: Massachusetts Tax Implications of Selected Provisions of the Federal CARES Act (June 4, 2020). For purposes of personal income tax, the DOR takes the position that because Massachusetts generally follows the Code as amended and in effect on January 1, 2005, PPP loan forgiveness is includable in Massachusetts gross income and subject to tax, and there is no disallowance of deductions attributable to the payment of expenses resulting in the forgiveness of the loan. For purposes of the corporate excise tax, the DOR takes the position that because Massachusetts follows the Code as currently in effect, PPP loan forgiveness for a corporate borrower is excluded from Massachusetts gross income and any deductions disallowed in accordance with IRS Notice 2020-32 would likewise be disallowed for Massachusetts tax purposes.
It is probably safe to assume that most if not all recipients of PPP loans expect to pay no federal or state tax in connection with the forgiveness of their PPP loans and would never have imagined that expenses paid for with PPP loan proceeds would not be deductible. But here we are.
- For federal tax purposes PPP loan forgiveness is not taxable, but expenses paid for with forgiven PPP loan proceeds are disallowed (unless federal administrative or Congressional action is taken to change the disallowance).
- For NH tax purposes, PPP loan forgiveness will be subject to the BPT and the DRA has yet to clarify its position on the disallowance of PPP loan expenses (although as illustrated in the Massachusetts approach to the issues, to tax the forgiveness and disallow the PPP loan deductions would be inconsistent with the basis on which the IRS based its disallowance of PPP loan expenses).
- For MA tax purposes, the DOR has taken a “draft position” that (i) for personal income tax purposes, PPP loan forgiveness will be subject to tax and the deductions related to the PPP loan will be disallowed and (ii) for corporate excise tax purposes, PPP loan forgiveness will not be subject to tax and the deductions related to the PPP loan will be disallowed
Given the near unanimous support in Congress for assisting struggling businesses by making the forgiveness of PPP loans tax-free and the obvious “slap-in-the-face” impact on business owners expecting tax-free PPP loan forgiveness for all tax purposes (let alone the possible additional slap from the loss of the related deductions), state action to resolve this would be welcome. Taxpayers concerned about this unexpected outcome would be well served by making their discontent known to their federal and state legislators. And with all that said, tax practitioners have been and will continue to be busy analyzing tax filing positions different from those taken by the states on the forgiveness issue and by the IRS and the states on the deductibility issue.
[1] DRA representatives have also taken the position in discussions with tax practitioners that Main Street Relief Fund Grants will be subject to tax under the BPT.