In a welcome development, both New Jersey and Pennsylvania have announced that they will conform to the federal government’s tax treatment in allowing Paycheck Protection Program (PPP) loans to be tax exempt at the state level and allowing recipients to deduct business expenses that were paid with the tax-exempt loan proceeds. New York State had previously advised that it will exempt PPP forgiveness and allow related expenses, so there is uniformity in the Tri-State Area on this important matter.
The PPP was established by the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act last year in in order to help small businesses keep employees on their payroll during the COVID-19 pandemic. Under the PPP, some or all of the loan may be forgiven if certain conditions are met. The amount of a PPP loan which is forgiven may be excluded from income for federal tax purposes and expenses covered by PPP loans may also be deducted from income for federal tax purposes.
New Jersey can follow the federal government’s forgiveness treatment without enabling legislation under existing authority granted to the governor. As a result, Governor Phil Murphy has announced that for both Gross Income Tax (GIT) and Corporation Business Tax (CBT) purposes, forgiven PPP loans will be excluded from income and related expenses paid for PPP loans will be deductible.
A law signed by Governor Tom Wolf on February 5, 2021 provides that, for personal income tax purposes, PPP loans forgiven by the lender are not taxable income, and associated expenses are deductible.
For Pennsylvania corporate net income tax (CNI) purposes, taxable income is based on federal taxable income. Pennsylvania law does not include a modification addback to, or deduction from, federal taxable income for forgiveness of a PPP loan. Accordingly, Pennsylvania conforms to the federal law for CNI taxpayers.
These actions by Governors Murphy and Wolf provide welcome relief for many individual and corporate taxpayers that have been impacted by the COVID-19 crisis. Not all states have similarly conformed to the federal tax treatment at this time, so depending upon where a business operates, the state taxation of PPP loans and expenses may differ.
Please contact your Mazars USA LLP professional for additional information.
Published on February 17, 2021