The U.S. Small Business Administration’s Paycheck Protection Program (PPP) provided small businesses with assistance through federally guaranteed loans. Many of those who borrowed money will qualify to have these loans forgiven. Eligibility for forgiveness requires the business owner to use the loan for qualifying purposes (like payroll costs, mortgage interest payments, rent and utilities) within a specified amount of time.
Normally, a forgiven loan is considered income on your tax return. However, Congress elected to exempt forgiven PPP loans from federal income taxation. States may decide to treat forgiven loans as taxable income, deny the deductions for expenses paid using forgiven loans or both.
How does my state treat forgiven PPP loans?
The following states both exclude the forgiven loan from income and allow deductions for expenses paid using the forgiven loan income.
California, Hawaii, and North Carolina exclude the forgiven loan from income but do not allow deductions for expenses paid using forgiven loan income. Virginia allows partial deduction for the expenses paid using the loan.
Minnesota, Utah and Vermont allow deductions for expenses paid using the Payroll Protection loan but the loan amount is to be included in taxable income.
Ohio allows for forgiven PPP loans to be excluded from taxable income and the expense deduction is allowed. Under Ohio’s Commercial Activity Tax (CAT), the loans are excluded from taxable gross revenue but, consistent with gross receipts taxation, the CAT does not allow a deduction for business expenses.