States allowing borrowers to deduct business expenses paid with forgiven PPP loan proceeds – Tax
United States: States allowing borrowers to deduct business expenses paid with forgiven PPP loan proceeds
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(March 26, 2021) – To determine their taxable income for federal income tax purposes, Payroll Protection Program (P3) loan borrowers can now deduct qualifying business expenses they paid with the proceeds of the surrendered P3 loan . See Consolidated appropriations law, 2021 (PL 116-260) (ARC, 2021, articles 276 and 278). The new law provides that no deduction is denied, no tax attribute is reduced and no base increase is denied due to the exclusion of income from the PPP loan remitted by the beneficiary. The change is in effect for tax years ending after March 27, 2020 (2020 tax year for calendar year taxpayers). See Rev. Rul. 2021-02.
For federal income tax purposes, P3 loans now offer a dual benefit: borrowers can exclude from gross income amounts of a P3 loan used to make qualifying expenses, and those expenses are tax deductible.
State response and trends
Most states have enacted their own laws to comply with the federal gross income exclusion from canceled P3 loans. Arizona, Florida, Idaho, Massachusetts, Minnesota, South Dakota, Nevada, New Hampshire, Texas, Utah, Vermont and Wyoming are exceptions and do not exclude PPP loans canceled from gross income. Note that many of these states do not levy personal or corporate income tax.
More recently, states have amended their tax laws to allow deductions for expenses paid with the proceeds of canceled PPP loans. For example, on March 17, 2021, Maine LD 220 was enacted, consistent with the federal exclusion of gross income from canceled PPP loans and the deductibility of expenses paid with proceeds from canceled PPP loans. On March 15, 2021, Kentucky House Bill 278 was enacted which, effective immediately, allows the deduction of expenses paid with the proceeds of canceled PPP loans. Kentucky law applies to deductions attributed to the proceeds of canceled PPP loans for tax years ending on or after March 27, 2020, but before January 1, 2022. To date, California, Hawaii, North Carolina North, Ohio, Texas, and Washington don’t. allow deductibility of expenses paid with the proceeds of canceled PPP loans. Virginia allows a partial deduction of expenses paid with the proceeds of canceled P3 loans.
What does that mean
Annual tax filing deadlines are fast approaching, but many state forms and instructions have already been released and do not describe the newly available deductions. States that have recently enacted laws allowing deductibility of expenses paid with the proceeds of canceled PPP loans will need to modify their tax instructions, software and forms to reflect these changes.
Taxpayers should take these legislative changes into account when preparing their tax returns. Taxpayers who have previously filed state income tax returns should consider filing amended returns to claim these new deductions for expenses that were previously not allowed for state income tax purposes. . Likewise, PPP loan borrowers should consider amending the relevant federal income tax returns where the borrower has not excluded the canceled PPP loan proceeds from gross income or deducted business expenses paid with the loan proceeds. PPP canceled.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought on your particular situation.
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