Are PPP Funds Taxable by the State?

As previously communicated, Congress passed legislation in December 2020 that made Paycheck Protection Program (PPP) loans excluded from federal gross income and the related covered expenses deductible for tax purposes. However, the impact of debt forgiveness and deductibility of expenses for state tax reporting purposes is an increasingly dynamic and complex consideration.

Please recognize that this is still a moving target for many states, and we remind taxpayers that in many cases, specific state decisions have not been made with respect to the exclusion of loan proceeds from gross income and the deductibility of expenses paid with those proceeds.

Virginia: At this time, Virginia has decided to not follow the federal guidance regarding the treatment of the loan forgiveness. The forgiven loan would be included in taxable income on the Virginia return. As of Monday, January 25, 2021, the Virginia legislature has begun reconsidering this position. If there are any changes to this position, we will provide updates.

Maryland: At this time, Maryland will conform to the Federal tax rules thereby excluding PPP loan forgiveness from income and allowing the related covered expenses as deductions.

District of Columbia: At this time, DC will conform to the Federal tax rules thereby excluding PPP loan forgiveness from income and allowing the related covered expenses as deductions.

North Carolina: At this time, the amount of forgiven PPP loan is not included in the calculation of taxable income, however, expenses paid using the proceeds of the PPP loan are not deductible when calculating state taxable income.

We are actively monitoring the state requirements and will provide updates as additional guidance is made available. We are hopeful that guidance will be available during the current filing season, but if delays from the states continue, filing state extensions might be necessary if you have a PPP Loan that has or will be forgiven.