April 27, 2021
Hot Topic Tuesday — Rhode Island to Join 17 States in Taxing PPP Proceeds
Congress chose to exempt forgiven Paycheck Protection Program (PPP) loans from federal income taxation. However, many states remain on track to tax them by either treating forgiven loans as taxable income, denying the forgiven PPP loan expense deduction, or both.
According to a fiscal analysis prepared for the U.S. House of Representatives, 33 states are fully exempting PPP loans from taxable income. However, that may soon change. In February, Rhode Island Governor, Daniel McKee, introduced a supplemental budget proposal for fiscal year 2021 that would decouple Rhode Island’s income tax from the federal internal revenue code (IRC) as it relates to the treatment of PPP loan forgiveness. Specifically, the governor’s proposal would allow the state to tax PPP loan proceeds exceeding $150,000.
“I think it is fair that they pay their fair share if they actually prospered during that timeframe,” says McKee. “And if you didn’t make money, it doesn’t matter how much the loan was… you are not paying taxes.”
According to the SBA, over 29,000 Rhode Island businesses and nonprofits received PPP loans. Of those loans, just 2,242 were worth more than $150,000, but they accounted for 42% of the proceeds. If those funds are taxed, the state of Rhode Island is estimated to make $68 million.
This pending legislation, along with parallel efforts in other states could open small businesses up to unexpected tax implications that they are not prepared to handle in the current economic climate. Therefore, SBA lenders should carefully consider tax implications when underwriting 7(a) and 504 loans in states planning on taxing forgiven PPP loans.
Click here to see a full list of state PPP tax policies.