Federal legislation enacted over the past year has provided many taxpayers with tax relief from the potential negative economic impacts created by COVID-19. The Coronavirus Aid, Relief, and Economic Security Act (CARES) enacted on Mar. 27, 2020, provided the Paycheck Protection Program (PPP), among other things. Under the PPP, qualifying businesses received loans to assist with continued operations and potentially qualified for these loans to be forgiven. Furthermore, the CARES Act provided that the loan forgiveness shall not be included in gross income of the business for federal tax purposes. More recently, on Dec. 27, 2020, the Consolidated Appropriations Act (CAA) was enacted, indicating that, for federal purposes, the exclusion from gross income would not cause otherwise deductible expenses to be denied their deductibility.
While there is clarity on the income exclusion and deductibility of related expenses for federal purposes, it is important to note that certain states will not likely follow the federal treatment. Further, other states have yet to issue guidance on such matters.
There are multiple considerations when performing an analysis on state conformity with these federal items. First and foremost is the method by which states conform to the Internal Revenue Code (IRC).
Rolling Conformity States
These states automatically conform to the current version of the IRC and must pass specific legislation to decouple from provisions of the IRC. Alabama and Tennessee are two examples of rolling conformity states. Based on their conformity provisions, both of these states automatically conform to both IRC provisions mentioned previously in this article.
Alabama released informal supplemental guidance on January 6, 2021 indicating their intention to allow a deduction for PPP related expenses. As of the date of this alert, Tennessee has not issued any guidance on this matter. However, absent specific guidance to the contrary, it can be reasonably assumed that as of the date of this alert both Alabama and Tennessee exclude PPP loan forgiveness from income and allow deductions for otherwise related expenses.
State (Fixed-Date) Conformity States
These states conform to the IRC as of a specific date through legislation, which is typically updated on an annual basis. Therefore, when there is a change to the IRC, these states do not conform to that change until their legislature takes action to do so.
For example, Virginia and West Virginia currently have IRC conformity dates that predate the CARES Act. Therefore, as of the date of this alert, neither of these states allow for an exclusion from gross income on amounts forgiven under the CARES Act. This makes an analysis on deductibility of related expenses a moot point at this time.
North Carolina’s conformity date occurs after the CARES Act but prior to the CAA, which would indicate that the state would allow for the exclusion from income under the CARES Act, but not allow for the deduction of related expenses. This is further confirmed by North Carolina guidance issued in July and October of 2020.
South Carolina is unique in that it has a conformity date that predates both Acts mentioned in this article, but the state also enacted special legislation that would allow for the exclusion of debt forgiveness income and the deductibility of expenses provided they were allowed for federal purposes.
Lastly, Georgia has a conformity date subsequent to the CARES Act but prior to the CAA. Based strictly on IRC conformity, one could conclude that as of the date of this alert, Georgia will allow the exclusion of loan forgiveness income, but not allow the deductibility of related expenses. However, the legislature typically updates Georgia’s conformity date every year, and once the legislature takes action in 2021, assuming they do not decouple from the deductibility of expenses, the related expenses will likely be deductible in Georgia.
As indicated above, state conformity with the federal Acts mentioned in this alert will vary greatly. It will also be subject to change as state legislatures convene this year. Certain rolling states might choose to specifically decouple from either of the provisions described in this alert. Further, static conformity states that currently do not conform might choose to do so. These changes, which may be unknown until several months into 2021 for many states, could still have an impact on tax treatment for 2020. Therefore, careful consideration as to how the state laws are currently written is critical when making decisions for financial statement and extension purposes.
DHG will continue to update state guidance on these issues throughout 2021. For any questions on these issues, please contact one of the DHG SALT Team members listed below or your DHG tax advisor. You can also reach out to us at firstname.lastname@example.org.