For both rounds of Paycheck Protection Program (PPP) loans, taxpayers need to be aware that the tax treatment of the loan forgiveness and expenses paid with PPP loan funds might differ between their state and federal tax returns. As with other federal tax law changes, for example, Section 179 and bonus depreciation, some states modify their tax laws to mirror those federal adjustments and other states do not make any moves to match up to the federal changes. This ends up causing some surprises for taxpayers when it comes to tax filing time.
For federal tax purposes, any PPP loan forgiveness is not taxable as income to the taxpayer. In addition, those expenses paid with PPP loan funds are deductible as they would normally be. In the following list, you will find an overview of tax treatment in a few states that our clients file in:
• Minnesota – In contrast to federal treatment, the amount of PPP loan forgiveness is taxable as income on a taxpayer’s Minnesota return, but any expenses paid with forgiven PPP loan funds are deductible as normal.
• Wisconsin – There is a strange split in the treatment of any PPP loan forgiveness. Currently PPP round 1 loan forgiveness is excluded from taxable income, but PPP round 2 loans that are forgiven will be required to be included in gross income for tax purposes. Contrary to the federal guidelines, any expenses paid with forgiven or forgivable PPP loan funds are not deductible for Wisconsin income or franchise tax purposes.
• Iowa – Following the federal guidance PPP loan forgiveness will not be treated as taxable income, but no additional specific guidance has yet been issued related to the deductibility of expenses paid by the PPP loan funds.
In areas where no specific guidance has been issued, we expect that some states may come out with guidance as we get deeper into filing season. There may also end up being changes to existing guidance before the filing deadlines arrive. If you are interested in learning more about a specific state’s treatment of PPP loans or any other tax law changes, please refer to the Minnesota Department of Revenue, Wisconsin Department of Revenue, and Iowa Department of Revenue websites.
Please contact us if you have questions about the items detailed in this article or the tax treatment of PPP loans in states other than those listed above. Information included in this article is accurate as of February 3, 2020.