As guidance in this area is being released regularly, we recommend you read all of our blogs on this subject. All the blogs in the Paycheck Protection Program series are here: Updates #1, #2, #3, #4, #5, #6, #7,#8,#9,#10,#11,#12,#13, #14, #15, #16, #17, #18,
Is it already February? The 2020 filing season is here and this year brings new challenges compared to other filing seasons. In PPP Update #19, we discussed the federal change to deductibility of expenses using Payroll Protection Program (PPP) funds, but what about states and localities? As we have become accustomed to, the PPP bares unique issues.
The taxability of the forgiveness proceeds has been addressed by some states, but the deductibility of expenses paid with PPP funds is relatively new and not yet addressed in most jurisdictions. If your business files in multiple state or local jurisdictions, you should consider the state and local impact before you file your 2020 tax returns.
When determining state tax implications for the PPP there are many things to consider:
1. Has the state or locality issued PPP-specific guidance?
- Given the unique nature of the PPP, many states and localities are issuing specific guidance. CAUTION: If you find guidance, be careful as it may be outdated and require updating for the Federal changes discussed in PPP Update #19. Some states released guidance regarding the treatment of the loan forgiveness but likely did not address the deductibility of PPP expenses. Recall the IRS previously disallowed expenses by equating the PPP funds with tax-exempt income. Some states and localities have similar rules to the IRS and may thus be required to provide a similar one-time exception for forgiveness of debt income and deductibility of expenses paid with PPP funds.
2. Is your business subject to corporate or personal income tax rules?
- Many states and localities have different rules for different types of taxpayers. Typically, C-Corporations are subject to corporate income tax rules while pass-through entities (partnerships and S-Corporations) are usually subject to personal income tax rules. It is not uncommon in the world of state & local taxes (SALT) for the two sets of rules to differ from one another. For example, a state may indicate that a C-Corporation can deduct the PPP expenses, while limiting the deductibility of PPP expenses to partners of a partnership.
- The interaction between federal tax laws and state and local tax laws is commonly referred to as conformity. There are three types of conformity:
Static (or fixed date) – The state chooses the Internal Revenue Code at a point in time. An example would be following the Internal Revenue Code of 1986.
Rolling – The state follows the Internal Revenue Code on a rolling basis incorporating changes automatically.
Selective – The state selectively chooses various pieces of the Internal Revenue Code. The choices range from entire Internal Revenue Code provisions to only specifically defined terms within the Internal Revenue Code.
It is important to note that despite conformity, even on a rolling basis where changes are automatically incorporated, a state can choose to decouple from any federal provision.
Whether states will address, update or ignore specific PPP guidance will be a constantly moving target; our crystal ball shattered somewhere around PPP Update #8. States that already released less- favorable guidance may be planning to change their position on PPP treatment given the recent favorable changes at the federal level; however, with the gaping hole in many state budgets, perhaps this is just wishful thinking. At this time, it may be prudent for taxpayers to extend and wait to file their 2020 business tax returns until the necessary clarity from any applicable state or local jurisdictions become available.
As with all things PPP, you should work closely with your tax professional to understand the state and local impact of the PPP. If you have questions on how to navigate the new provisions of the PPP program, please call on us. You can stay up to date on PPP guidance and tax issues relating to the coronavirus at our COVID-19 Tax Resource Center.