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Is Your PPP For Forgiven Loan Subject to State Income Tax?

In 2020, the Small Business Administration (SBA) Payroll Protection Program (PPP) was created to assist for-profit and non-profit employers in maintaining their payroll during the COVID-19 pandemic. This program provides 100% federally insured loans for certain covered expenses and are normally forgiven in full if employees are retained at salary levels comparable to those before the crisis.

In a normal situation, forgiven loan amounts are generally taxable for federal income tax purposes. Under section 1106(i) of the CARES Act, Congress allowed the forgiveness of PPP loans from federal gross income, hence no federal income tax.

Some questions you may have might be: will these forgiven loans be subject to state income tax or, what about expenses incurred?

On December 27, 2020, Congress allowed all expenses related to PPP loans to be deductible. However, at this time, North Carolina Department of Revenue has said they will not follow federal law regarding deductibility of PPP expenses, therefore, requiring an addback to taxable income. Several bills to change this have been introduced in the North Carolina Legislature, but have not gained traction at this time.

As a taxpayer, you should evaluate the state tax effects when applying for PPP loans and the concerns of having these loans forgiven. Take time to review your state’s conformity rules regarding debt forgiveness, their response to the CARES Act and how they are handling expenses. We will continue to monitor these changes and keep you updated.

If you have questions or concerns, please call us to speak to one of our tax professionals.