Bradley attorney Bruce Ely was quoted in Bloomberg Tax on the tax hurdles that states and taxpayers may face regarding the small business relief loans. Debt forgiveness usually counts as a taxable benefit, but Congress made loans from the Paycheck Protection Program forgivable as long as certain conditions are met and said the federal government would not tax the discharged debt. However, some states may end up taxing debt relief intended as economic aid if they don’t update their own tax codes to allow for corresponding forgiveness.
Ely said he is working with an Alabama senator to determine whether the state needs to pass a bill that specifically exempts PPP loan forgiveness from the state’s version of the cancellation-of-indebtedness rules. As it’s written, the coronavirus relief law “does not constitute an amendment to the IRC,” he noted.
For states with rolling or automatic conformity to the IRC, like Alabama on the corporate income tax side, the language in the federal relief law may be enough to protect taxpayers from adverse state income tax consequences, Ely said. “However, I’d want an announcement or ruling from the state DOR to confirm that,” he said.
Since a state like Massachusetts generally adopts the federal code for personal income tax purposes, PPP loan forgiveness would likely be included in the state’s personal taxable income, Ely said. But lawmakers could specifically adopt a provision exempting the loan amount from the state’s personal income if they wanted to provide certainty, he added.
For states conforming to the IRC “as amended from time to time” or in “effect from time to time”—as Alabama’s conformity statute reads—a beneficiary of that state’s income tax revenue might challenge the state DOR’s favorable interpretation, Ely explained.
“Perhaps a governor or state DOR could wave their magic wand and announce that the income will be exempt from state income tax, but that could be subject to challenge down the road by, for example, a beneficiary or recipient of those revenues,” Ely said.
The original article, “Small-Business Relief Loans Could Face Some State Tax Hurdles,” first appeared in Bloomberg Tax on April 21, 2020.