Forgiven PPP Loan Funds Are Taxable (Unless New Laws are Passed)
A forgiven loan received under the Paycheck Protection Program (PPP) not only will have Federal tax implications but will also trigger both New Hampshire and Maine state tax, even though the federal law establishing the program states the forgiven loan is excluded from income. Congress intended the forgiven loan to be tax free. But, due to other provisions in Federal and state law, a forgiven loan will not be tax free unless Congress and state legislatures pass new laws, as outlined in greater detail below.
Federal Income Tax
For Federal income tax purposes, a forgiven PPP loan is taxable because the IRS does not allow deductions for expenses paid with tax-exempt income. The IRS views forgiven PPP loan funds as tax-exempt income because they are excluded from gross income under Federal law. Therefore, expenses paid with forgiven PPP loan funds are not deductible because they are paid with tax-exempt income. The effect of denying a deduction is to make taxable the income that was used to pay the deduction. For example, if a taxpayer has $500 of tax-exempt income and uses the money to pay an employee $500 of wages, the $500 of employee wages is not available as a deduction to offset $500 business income. In effect, the $500 of tax-exempt income is taxable because the expense paid with the money is not deductible.
In New Hampshire, a forgiven PPP loan is included in taxable income for business profits tax (BPT) purposes. New Hampshire does not recognize a forgiven PPP loan as tax exempt because it recognizes Federal income tax law in effect on December 31, 2018, which is before the Federal PPP loan was created in 2020. However, New Hampshire does allow deductions for business expenses paid with forgiven PPP loan funds. For business enterprise tax (BET) purposes, forgiven PPP loan funds are included in the enterprise value tax base if they are used to pay wages or other compensation to employees, interest, or dividends. The New Hampshire Department of Revenue Administration issued a Press Release on August 18, 2020 confirming the state tax treatment of forgiven PPP loan funds.
In Maine, a forgiven PPP loan is included in taxable income. Maine recognizes Federal income tax law in effect on December 31, 2019, so the 2020 federal exclusion of forgiven PPP loan proceeds from gross income does not apply. However, a deduction should be allowed for business expenses paid with forgiven PPP loan funds. In June 2020, Maine Revenue issued a Tax Alert indicating the Governor was considering proposing legislation to conform state tax law to federal tax law. However, as of now, legislation to that effect has not yet been proposed.
Stay tuned for more updates.
If you or your clients have any questions regarding forgiven PPP loan funds, the Bernstein Shur Tax Team is pleased to assist you. To learn more, visit our tax webpage.