States Tax Treatment of the SBA PPP Loan Forgiveness Program under the CARES Act – Cristina Bucksbaum, Senior Tax Manager

The Paycheck Protection Program is designed to be a forgivable loan if certain conditions are met.  The forgiveness of debt shall be excluded from gross income for federal income tax purposes as expressed by the federal government in the CARES Act.

Currently, states have not given guidance regarding tax treatment regarding SBA PPP forgivable loans. 

Taxpayers may gain relief from the discharge of debt at the state level considering previous tax policy. 

Before Covid-19, the following states (Illinois, Iowa, Kansas, Missouri, Minnesota, Nebraska and North Dakota) conformed to the federal treatment of discharge of debt under I.R.C. § 108, therefore no additional modification to federal taxable income was necessary in the computation of state tax.

In addition, these states (except for Minnesota) conform on a rolling basis and requires legislative action to decouple from new federal amendments.

California generally conforms to the federal treatment of discharge of indebtedness but does not conform to the federal provisions allowing deferral of discharge of indebtedness income. Because California has a static I.R.C. conformity date of Jan. 1, 2015, and requires legislation to adopt I.R.C. amendments enacted after the conformity date, California does not conform to the amendments to I.R.C. § 108 made by the 2017 tax act.

We will of course monitor this situation as developments arise.