January 26, 2021

PPP Loan Forgiveness: Conformity for State and Local Taxes

By John Bonk, National State & Local Tax Leader & Alex Toback, Staff Accountant, Tax & Business Services

PPP Loan Forgiveness: Conformity for State and Local Taxes State & Local Tax

One of the major relief provisions for small businesses under the Coronavirus Aid, Relief, and Economic Security (CARES) Act was the Payroll Protection Program (PPP). The rules for forgiveness related to PPP loans were clarified in the Consolidated Appropriations Act signed into law this past December, which explicitly states that amounts forgiven under the PPP are not taxable for federal income tax purposes.

From a state and local tax perspective, however, PPP loan forgiveness may give rise to taxable income.

Jurisdictions that Have Released Guidance

The jurisdictions that have ruled they will conform to the federal treatment of the non-taxability of PPP loan forgiveness and not subject the forgiveness to state income tax include Alabama, California, Connecticut, Hawaii, Indiana, Kentucky, Mississippi, Montana, New York, North Carolina, Oregon, Pennsylvania, South Carolina, and Tennessee.

Jurisdictions that have released guidance and do not conform to the federal treatment — and, therefore, may tax all or a portion of the income — are Massachusetts, Minnesota, New Hampshire, and Wisconsin.

What happens if a jurisdiction has not released guidance?

Typically, when jurisdictions have not released guidance, the conformity will depend on how the state conforms to the Internal Revenue Code (IRC). The methods that jurisdictions apply when conforming to the IRC are Fixed/Static, Rolling, or Selective.