TAX TOPICS
HOW PPP LOAN FORGIVENESS WILL AFFECT
T
the 2021 Texas Franchise Tax By Remington T. O’Dell, CPA
he Payroll Protection Program (PPP) was created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March of 2020. The program closed on August 8, 2020 after providing billions in potentially forgivable loans for businesses and non-profits to keep workers on the payroll.
accordance with CARES Section 1106(I):
• Will not reduce any deductions attributable to those funds.
“For purposes of the Internal Revenue Code of 1986, any amount which (but for this subsection) would be includible in gross income of the eligible recipient by reason of forgiveness … shall be excluded from gross income.”
Deductions are allowable for expenses paid with the proceeds of a forgiven PPP loan. In accordance with the provisions of the bill, this change is retroactive to date of enactment of the CARES Act.
Much time and effort has been paid to how the forgiveness of PPP funds will affect federal tax planning; however, not as much attention has been paid regarding the state tax considerations. Only recently have states begun to issue any guidance on whether the forgivable PPP loan proceeds are taxable at the state level.
While many tax professionals took this language as verification of Congress’s intent to exclude the forgiven PPP loan proceeds from being taxed, that was not the interpretation of the IRS. In Rev. Rul. 2020-27, the IRS states that a taxpayer may not deduct eligible business expenses that were paid with PPP loan proceeds, if the taxpayer reasonably expects to receive forgiveness of its PPP loan.
Depending on the guidance issued, many taxpayers that have never filed a state tax return before may find themselves forced to do so for 2020, including taxpayers subject to the Texas franchise tax.
Federal Tax Treatment Initially, PPP funds were touted to be excluded from taxability. In 6 Texas Society of CPAs
With the passage of the 2021 Omnibus Appropriations Bill by Congress on December 21, 2020, clarification on the tax treatment of PPP forgiveness has finally been provided. The bill makes clear that PPP forgiveness: • Is not taxable, • Is excluded from income, and
Texas Franchise Tax Treatment Although the 2021 Omnibus Bill brings good news on the federal level, things are quite different on the state level. In accordance with a general information letter (GIL202012080995540) issued by the Tax Policy Division of the Texas Comptroller of Public Accounts on December 11, 2020: “If a Paycheck Protection Program (PPP) loan is forgiven, the debt forgiveness will be considered income for franchise tax reporting unless it qualifies for an exception from being recognized as income under the 2007 Internal Revenue Code.” While general information letters are not binding on the Comptroller,
