Tax Spotlight: PPP Deductions on State Tax Returns
By Louisa Else, Tax Practice Leader
Last month, we highlighted many of the uncertainties that are still lingering about the upcoming tax season. This month, we wanted to highlight one of these - the states' approach to deducting expenses paid by PPP funds. When the IRS initially made their decision months ago, they started a waterfall of implications that are still ongoing. While the latest COVID-related package reversed that IRS decision, it does not affect the decisions at the state level. Each state must decide its own treatment of the loan forgiveness and the expenses.
While we know that our clients are spread out across many states, we wanted to highlight the current situation here in Wisconsin. If you've been following the situation the past few weeks, you might be aware that there has been some movement in a broad COVID-related bill that is moving between our governor's office and the legislature. As of this writing, no bill has been signed yet. This leaves us with some disparate tax treatment, depending on which PPP loan round we are talking about.
For first round PPP loans (taken out by most companies early in 2020), the treatment for Federal taxation laid out in the original CARES Act was adopted by Wisconsin as part of the 2019 Wisconsin Act 185. This means that just like on the Federal return, the proceeds from the forgiveness of the loan are not subject to tax in Wisconsin. However, since no further state legislation has passed, Wisconsin is still following the original IRS determination that the expenses paid with the PPP funds are not deductible. In practicality, this means that there will need to be state-only addback on the Wisconsin return to increase the Wisconsin taxable income.
For those who qualified and obtained a second round of PPP funding, the rules are, of course, different still. Since nothing has been passed in Wisconsin since the December relief bill, Wisconsin does not conform to the tax-free treatment of the PPP forgiveness. The forgiveness amount will therefore be taxable. It follows then, that the expenses are going to be fully deductible as normal, so in this scenario, the state-only addback will be to add the amount of forgiveness back, which again will increase the Wisconsin taxable income in comparison to the Federal taxable income.
If you're tracking this closely, you'll notice that yes, these two treatments bring you to the same end result. Because it's taxes, they insist on making us take the complicated path to get there, depending on each situation.
If you're based in or operating in other states and you're curious where those states stand, Fine Point's tax team is here to help! Reach out to me at email@example.com and I am happy to let you know what the treatment in any state is going to be - at least at that specific moment in time.