MA Tax Issue Regarding Forgiven PPP Loan Proceeds

MA Tax Issue Regarding Forgiven PPP Loan Proceeds

January 21, 2021
By Tonneson
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We want to share some news regarding Paycheck Protection Program (PPP) forgiven loan proceeds for individual income taxes includable in Massachusetts (Mass.) taxable income.

Currently individual taxpayers that received PPP loan proceeds for either their schedule C business or through a pass-through entity (like a partnership, Limited Liability Company or Sub Chapter S Corporation) and that later had the proceeds forgiven will need to include in Mass. income the debt forgiveness as ordinary income to the extent that these proceeds would be taxable on the individual’s personal income tax return. In addition, Mass. law would allow a deduction for the expenses paid with these proceeds. In this case, the income would in theory be offset by the deductions.

Federal law not only allows the expenses paid with the PPP loan proceeds to be deducted, but the proceeds are also considered tax exempt income. This results in a kind of “double dip” in allowing the deduction but not having to include in income the amount of the debt which was forgiven under the PPP rules. This Federal Law was enacted as part of the Consolidated Appropriations Act (CCA) in late December, 2020.

When Federal Laws change, in Mass. there is an automatic mandate that Corporations will follow current Federal rules. So any Mass. corporations will be able to exclude the forgiven proceeds for Mass. income tax purposes. Currently this is not so for individuals whose business income comes from a schedule C or pass-through entity. The reason for this is that for individual taxation in Mass. there is not an automatic change to current Federal law. Mass. is still following the Federal Code as it existed as of January 1, 2015 and has not updated this rule since then. However, certain specific Massachusetts personal income tax provisions can automatically conform to the current IRC if the law mandates the conformity.

In response to the public and professional concern over this issue, the Massachusetts Society of CPAs appealed to the legislature and in response Senator Eric Lesser filed SD.172, An Act providing financial relief to small businesses during the COVID-19 pandemic that addresses the issue. Bill SD.172, text of which is below, if passed would allow individuals to conform to the Federal Law as well and eliminate the need to include the forgiven debt in income while still taking the deductions as before.

Bill SD.172

SECTION 1. Paragraph (2) of subsection (a) of section 2 of chapter 62 of the General Laws, as so appearing in the 2018 General Laws, is hereby amended by adding the following subparagraph:-
(R) An amount which, but for this section, would be included in the gross income, in whole or in part, of an eligible recipient, as described in subsection (a) of section 1102 of the Coronavirus Aid, Relief, and Economic Security Act, P.L. 116-136, because of the forgiveness described in subsection (b) of section 1106 of said act.

Bill SD.172, introduced this week, will need to go through the legislative process before we know for sure whether or not this important exclusion will be available to individuals. We will keep you posted on its progress.

Should you have any questions, please don’t hesitate to reach out to your tonneson + co representative.