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Washington Update and State Taxation of PPP Loans

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As legislators across the country meet to respond to the pandemic’s effect on their state’s economy, the question of how state taxes will apply to federal stimulus programs is being debated.  For Washington, that question has been answered.

Washington’s Business and Occupation (B&O) tax applies to all gross receipts of a business unless an exemption exists.  Therefore, grants and forgiven loans (such as PPP loans) previously would be included in reportable gross receipts, absent legislative action.  However the Department of Revenue had previously issued guidance to not report forgiven PPP loans under the presumption that the legislature would address the issue in the current session.

Governor Inslee signed Senate Bill 1095 on 02/19/2021.  This bill provides an exemption from B&O, Public Utility Tax and sales tax for receipts from qualified grants received in response to a declared state of emergency, such as the Covid-19 pandemic.  This bill did not change the taxability of any expenses or costs which the funds are used to pay.  Sales tax still applies to any taxable purchases.

In addition to Washington, other states are looking at how to treat the PPP loan forgiveness and related expenses. At this point guidance is still lacking from many states and the specific impact will depend on how a state administers its taxes (i.e. income tax, gross receipts, etc.) and what type of entity structure a business is formed as. For example, in Florida their determination will only affect C-corporations as there is no personal income tax, but in Texas even though they have no personal income tax their determination will affect all entity structures because they have a modified gross receipts tax.

Some states have addressed if the forgiven loan proceeds are includable income, but they have not addressed if the expenses are deductible and other states have not provided guidance for either. Below is the guidance issued thus far by some states:

California has provided guidance that the forgiven proceeds are not includable in income, but they have not addressed whether the expenses are deductible. Legislation, AB-80, has been introduced, which would make up to $150,000 of expenses covered by the PPP loan deductible, we will continue to monitor this.

Hawaii has provided guidance that the forgiven proceeds are not includable in income and the expenses are not deductible.

Idaho has not provided any specific guidance, but because they do not conform to the CARES Act or any other subsequent federal legislation the PPP loan proceeds are includable in income and we would then hope that the expenses would be deductible. If Idaho has any intention of changing this is yet to be seen.

Montana has issued guidance that forgiven PPP loan proceeds are not includable in income and the associated expenses are deductible.

New York has issued guidance that forgiven PPP loan proceeds are not includable in income and the associated expenses are deductible.

Oregon has provided guidance and the forgiven proceeds are not includable in income and they are not considered commercial activity for the Oregon CAT. In an FAQ on the Oregon Department of Revenue website they have stated that the expenses related to PPP loans are tax deductible. Oregon has proposed HB 2253 which would impose a 10% surcharge on PPP loans if a business’s gross receipts for 2020 exceed their 2019 gross receipts by more than 5%. Since this is just proposed legislation we do not have much guidance on how this would actually work, we will continue to monitor this.

Texas follows the IRC that was in effect on January 1, 2007 so that means unless Texas passes a specific ruling the PPP proceeds will be includable income and the associated expenses can be deducted.

We have created a quick reference table for all of the states, please note that this information is changing quickly so know that this is just a tool. If there is a particular state you have a question about please contact your Berntson Porter representative at 425-454-7990. We are here to help!

Berntson Porter is here to help businesses navigate these challenging times. Visit our Resource Center for up-to-date information about COVID-19 legislation that impacts you and your business.