Paycheck Protection Program (PPP) forgivable loans, which were used by nearly 90 percent of recreational boat dealerships for support during the shutdowns caused by the pandemic, are at risk of being included as income by some state governments, possibly making the forgiven portions taxable.
Passed in the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020, the U.S. Government distributed more than $500 billion in PPP loans to qualifying small businesses last year. Guidance on the program has changed several times since it was first passed, most recently in the $1.4 trillion omnibus/COVID-19 spending package, which clarified the original intent of PPP with the Internal Revenue Service to ensure that forgiven PPP loans were not included as taxable income at the federal level, and that businesses can claim normal tax deductions for business expenses paid for with forgiven portions of PPP loans.
Here’s where things get tricky.
Each state implements its own income tax structure that has some degree of conformity with the federal Internal Revenue Code. Twenty-one states and the District of Columbia automatically adopt any changes made at the federal level through what’s called “rolling conformity,” meaning that boat dealers in these states with forgiven PPP loans likely won’t pay taxes on the proceeds of the loan. The Tax Foundation, a Washington, D.C.-based think tank that publishes data and research studies on U.S. tax policies at both the federal and state levels, argues that states could choose to not comply with the guidance provided in the recent omnibus package, since it did not expressly modify the tax code. Consider rolling conformity states as “opt-in” states, where lawmakers or state revenue officers would need to opt-in to taxing PPP as income.
In 19 other states, lawmakers must vote to conform to any changes in the tax code, which in this case, excludes PPP from taxable income. This is called “static conformity.” This is an “opt-out” method, where state lawmakers would likely tax forgiven PPP loans unless specific guidance is given stating otherwise, or legislation is passed to exempt forgiven PPP loans from state taxable income.
Yes, it’s confusing, and it doesn’t end there: Five states have “selective tax conformity,” which, according to The Tax Foundation, means that they “may incorporate certain federal provisions or definitions by reference, but omitting large swaths of the federal tax code and forgoing the use of federal definitions of income as their own starting points for calculation.”
Five other states do not tax income. Meanwhile, Pennsylvania and Massachusetts have rolling tax conformity for corporate income taxes, but have static/selective conformity for individual income taxes.
In the Tax Foundation chart on the left below, states with static conformity are highlighted in yellow. You’ll notice when comparing it to MRAA’s chart (right), that some of those states (i.e. California, Hawaii, Indiana, Kentucky, North Carolina, Ohio, Oregon, South Carolina, etc.), which are highlighted in green, already passed legislation or issued guidance clarifying that forgiven PPP loans will not be included as taxable income; other states highlighted in green have rolling tax conformity. States highlighted in blue on the right have not yet issued clarifying language or legislation at the time this article was written; while, states in red have indicated that they will tax forgiven PPP loan proceeds.
South Dakota and Wyoming do not impose corporate or personal income taxes. Nevada does not impose a personal income tax and only imposes gross receipt taxes, in lieu of corporate income taxes. These three states are striped for these reasons.
Newly introduced legislation in Maine (also striped) proposes to not tax the first $1 million of forgiven PPP loans a business received. Massachusetts, New Jersey and Wisconsin legislatures have introduced bills explicitly seeking to exclude forgiven PPP loans from taxable income.
The Marine Retailers Association of the Americas is monitoring this situation closely, and working with MRAA members and partners in each state in an effort to ensure that states comply with PPP tax forgiveness, as was originally intended. When state governments don’t conform with the recent omnibus guidance and exclude forgiven PPP loans from income, dealers face more complicated and costly tax burdens, effectively undermining a program that was intended to help keep their businesses open through the pandemic.
Many states have not announced how they will proceed with this matter, but there is concern and speculation that many state governments may tax forgiven PPP loans to help make up for a collective $121 billion revenue shortfall over the next two years. But the conversations around this topic are gaining steam.
MRAA will continue to update you on these matters, but in the meantime, you can see how your state is treating forgiven PPP loans, or if your state allows deductibility of expenses paid with PPP loans, by reviewing the table below.
|
State |
Taxability of forgiven PPP loan |
Deductibility of expenses paid for by PPP loan |
Resources |
|
Alabama |
Not Taxable |
Deductible |
|
|
Alaska |
No Guidance |
No Guidance |
|
|
Arizona |
No Guidance |
No Guidance |
|
|
Arkansas |
No Guidance |
No Guidance |
|
|
California |
Not Taxable |
Not Deductible |
|
|
Colorado |
No Guidance |
No Guidance |
|
|
Connecticut |
Not Taxable |
No Guidance |
|
|
Delaware |
No Guidance |
No Guidance |
|
|
Florida |
No Guidance |
No Guidance |
|
|
Georgia |
No Guidance |
No Guidance |
|
|
Hawaii |
Not Taxable |
No Guidance |
|
|
Idaho |
No Guidance |
No Guidance |
|
|
Illinois |
No Guidance |
No Guidance |
|
|
Indiana |
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