So you have a PPP loan? What this means for your state taxes: Boston News, Weather, Sports
And the Congress made this lifeline even stronger two big tax breaks: PPP loans issued are not subject to federal income tax and small business owners can use their PPP money to deduct business expenses paid. (Typically, canceled debts are taxable, and only business expenses paid on company income are deductible.)
But small business owners may not get the same tax breaks when it comes to their state taxes.
Many state legislators have not yet decided whether to accept or reject the tax changes at the federal level. Many will likely make a decision in the next few months and likely make the changes retrospectively to 2020. But where the individual states come to this issue remains to be seen.
“Many states have not provided direct guidance and those that have provided guidance have not followed a consistent approach,” said Brian Kirkell, principal at tax, accounting, and advisory firm RSM.
A state will not necessarily make an all-or-nothing decision either.
“Even if some states adhere to the income exclusion for issued PPP loans, they can still choose to use federal rules and regulations that allow taxpayers to deduct qualified business expenses from income when they are paid with PPP loan funds, stay decoupled, ”said Julie Sforza-Smith, program manager at H & R Block’s tax office.
For example, Alabama and South Carolina have stated that they will offer the same two tax breaks on PPP loans as the IRS does. But North Carolina and California will only adopt one of them – treat the loan made as tax-free.
In some states, such as Massachusetts and Pennsylvania, whether a small business is eligible for any of the PPP-related tax breaks, whether its state taxes are filed under the corporate income tax act or the individual tax act.
With so much uncertainty and complexity around the state’s tax treatment of PPP loans, “practitioners and software vendors have made educated guesses,” said Kirkell.
His advice to small business owners: Before filing, speak to a tax advisor who is familiar with your state’s tax laws.
And if you can afford to wait for a state and local tax refund that you might be owed, apply for an extension of your state taxes. In a few months’ time, you will likely have a clearer picture of how your state plans to treat your waived PPP loan and the deductibility of your business expenses for not just tax 2020, but tax 2021 as well. That won’t be relevant since the pandemic, nor is the PPP program over.
If you can’t afford to wait, “take a filing position based on the limited guidance we have and understanding that the guidance is subject to change and may require filing an amended statement,” Kirkell said .
However, some states may give you clarification before April 15, so it pays to hold your return on hold for a few more weeks.
In West Virginia, for example, law is likely to be signed in the coming days that will follow the IRS in handling both PPP-related tax breaks, Sforza-Smith said. “We recommend applicants from West Virginia reporting on PPP loans granted to wait a little longer so that they do not have to change their state declaration.”
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