The state of Utah recently announced that they will tax Paycheck Protection Program (“PPP”) loans in the year the loans are forgiven, while allowing full deductibility of expenses paid for with forgiven PPP loan proceeds. This came as a surprise to many as it represents a departure from the norm for a state that generally conforms to Federal tax provisions.
By way of background, the current Federal treatment of PPP loans is as follows:
- PPP loan forgiveness is not taxable.
This was put in place by the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act introduced in March of 2020.
- Expenses paid for with forgiven PPP loan proceeds are fully deductible.
A month after the passage of the CARES Act, the IRS released Notice 2020-32, which indicated that expenses paid for with forgiven PPP loan proceeds would be nondeductible. This position was eventually overturned by Congress in December of 2020 when the Consolidated Appropriations Act was signed into law.
In essence, Federal law currently allows businesses to “double-dip.” That is, they receive tax-exempt income (PPP loan forgiveness) while at the same time enjoying the full deductibility of expenses paid for with that tax-exempt income.
Throughout 2020, Utah was in lockstep with Federal law. After the CARES Act was passed, the Utah State Legislature introduced S.B. 6005, which made PPP loan forgiveness exempt from state tax. At the time of its passage, Sen. Wayne Harper, the sponsor of the bill said, “As state leaders, we want to ensure that Utahns and Utah businesses keep the rebates and grant funds to utilize for their specific situations, without the concern of taxation. Prohibiting all state income tax on COVID-19 funds…provides Utahns with more resources during these challenging times.”
Given statements like the one above from Utah lawmakers, it was expected that when the Consolidated Appropriations Act became law and allowed for the “double-dipping” of tax benefits that Utah’s law would eventually follow suit.
The issue is that when S.B. 6005 was introduced, the tax benefits to borrowers were only one-sided. That is, PPP loan forgiveness was tax-exempt but expenses were non-deductible. It was when the Federal government granted the double tax benefit of tax-exempt income and full deductibility of expenses that the state of Utah decided to decouple itself from the federal provisions.
Additional state aid was left out of the legislation passed last December, and perhaps that is one reason Utah and many other states are looking at taxing PPP loans as a way to generate significant revenue.
Whatever the case, Utah’s announcement is disappointing news for recipients of PPP loans, and even more so considering Utah’s long history of conforming to Federal tax law.
For more answers to tax questions regarding PPP funds, contact your Larson & Company advisor today.