The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted March 27, 2020, was designed to assist taxpayers during difficult times by introducing new and modified tax law provisions intended to allow businesses to retain more cash to help them survive the crisis. As the country is trying to adjust to the “new normal”, what state and local tax implications should business owners consider when budgeting cash needs?
Paycheck Protection Program (PPP)
The PPP is a loan designed to provide a direct incentive for small businesses to keep their workers on the payroll. Businesses have the opportunity to request loan forgiveness if all employee retention criteria are met, and the funds are used for eligible expenses. The forgiven debt is not includible in income for the business nor are the related expenses eligible for deduction.
What is the impact of PPP on State and Local Tax Filings?
As we wait for more guidance form the taxing authorities, probably not surprising, PPP debt forgiveness treatment varies by state:
- For some states, PPP loan forgiveness is not considered income for state purposes
- For other states, PPP loan forgiveness is deemed income for state purposes
- Permutations of whether expenses are deductible or not exist
What are some of the federal modifications that will result in tax savings?
- Interest Deductions – Temporary change in interest expense deduction limitations, which increased the limitation on deductible interest from 30% to 50% of adjusted taxable income (ATI) for 2019 and 2020. The change also allows a business to use 2019 ATI in calculating its 2020 limitation. For 2019, this update does not apply for partnerships. However, partners are allowed to deduct 50% of their distributable share of the partnership’s excess business interest in 2020.
- Net Operating Loss – Net operating loss (NOL) deduction relief. NOLs generated in 2018, 2019, or 2020 can be carried back for five years. The change also allows NOL deductions to fully offset income in tax years beginning in 2018, 2019, and 2020. Retroactively allows NOLs arising in a tax year beginning in 2017 and ending in 2018 to be carried back two years.
- Qualified Improvement Property – One other helpful federal modification is the technical correction providing a 15-year period for qualified improvement property (QIP), which makes QIP eligible for bonus depreciation.
What are the CARES Act state tax implications to the Federal modifications?
Analysis of the CARES Act is important for state tax purposes as states may be treating Federal modifications differently. Therefore, decision-makers should understand the state treatment of the CARES Act to ensure informed decisions are being made.
- States with rolling date conformity adopt the Federal changes automatically
- States with fixed date conformity adopt the Federal changes as of a specific date or adopt only specific sections
Based on the above-mentioned conformity rules, each state must be separately analyzed to determine the impact of the CARES Act and whether cash needs may be different than the Federal. The CARES Act is still new, states are still analyzing it and are introducing new legislation. As such, it is important to stay tuned to any future developments.
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