State and Federal Tax Considerations on PPP Loans

Date: May 07, 2020

NFIB Hawaii Leadership Council Chairman Ron Heller, a tax attorney, offers some things to think about

Caution: This is written as of May 6, 2020. The IRS, Congress, the Hawaii Department of Taxation, and the Hawaii Legislature may issue further information or make changes. Check with your tax advisor for the latest update. This is only general information; check with your tax advisor if you want specific advice regarding your situation.

If you get a PPP loan, the loan money is not gross income when you receive it. In general, when you receive money as a loan, that is not gross income. If and when the debt is forgiven, the cancellation of indebtedness may potentially be income. Note that for some taxpayers, these two things (receiving the loan and official cancellation of the debt) could potentially happen in different tax years.

For federal income tax purposes, if it’s a PPP Loan, then cancellation of the debt does not create taxable income. That is part of the law creating the PPP Loan program. According to the IRS, however, you do not get a deduction for expenses paid with the loan money. For example, you get a $100 PPP Loan and use $95 of the money for payroll expenses that qualify for loan forgiveness. When the $95 of debt is forgiven, you do not have income from the cancellation of debt. However, you cannot take an income tax deduction for the $95 of payroll expenses paid with the PPP Loan money. Since only $95 is forgiven, you have to pay back the remaining $5 of the loan; you may deduct expenses paid with that $5.

For Hawaii state income tax purposes, even though it’s a PPP Loan, cancellation of the debt does create taxable income. The Hawaii Legislature would have to act to change that. Taking the example above, the cancellation of $95 of debt creates $95 of gross income for Hawaii purposes. Because the income is reportable, however, you can deduct expenses paid with the $95.The $5 of loan money that you have to pay back is not added to gross income, and you may deduct expenses paid with that $5.The PPP Loan proceeds are not subject to Hawaii General Excise Tax.

Note that under both federal and Hawaii law (as currently existing), the net tax impact of receiving and using the $95 is zero. On the federal side, the $95 does not count in either income or deductions. On the Hawaii side, the $95 does count in both income and deductions, netting out to zero.

Congress is currently talking about a “clarification” (or amendment) to the law that would allow the deduction of the $95 for income tax purposes, even though the cancellation of $95 of debt does not count in gross income. That would mean you get a “free” reduction of $95 in your taxable income – instead of a net-zero impact on taxable income, the net impact would be to decrease your taxable income by $95. Whether Congress will actually do this – and whether states, including Hawaii, will follow along – remains to be seen.

Ron Heller, Attorney
Torkildson Katz Hetherington Harris & Knorek


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