The Small Business Administration has issued more than 118,000 Paycheck Protection Program (PPP) loans, totaling $14.3 billion, to businesses in Massachusetts. Many of these loans have been forgiven or are eligible for forgiveness. The income from the loan proceeds will not be taxed by the federal government and all expenses paid for with forgiven PPP loan proceeds will be deductible. But the Commonwealth of Massachusetts is a different story.
As it stands right now, as the tax filing deadlines quickly approach, small businesses that have had their PPP loans forgiven could face a tax bill on the forgiven loan proceeds. Massachusetts will allow businesses to deduct the expenses paid with PPP loan funds but see below.
For taxpayers subject to the Massachusetts personal income tax, including unincorporated businesses reporting income and expenses on Schedule C, partners in a partnership, and individual shareholders of an S corporation, any amount forgiven under the CARES Act is includable in gross income and subject to tax.
For purposes of the corporate excise tax, Massachusetts follows the Internal Revenue Code as currently in effect. Therefore, any amount forgiven for a C corporation borrower would be excluded from Massachusetts gross income. So good news here.
But because S corporation shareholders are subject to the personal income tax on their share of the S corporation’s income, shareholders will be subject to tax on their share of any forgiven PPP loans. However, forgiven PPP loan proceeds will be excluded from income for purposes of the S corporation entity-level excise tax (the “STING Tax”).
Whether you are subject to the personal income tax or the corporate excise, if your expenses are deductible on your federal return, they are also deductible on your Massachusetts return.
There is proposed legislation to make forgiven PPP loans tax free, conforming to the federal rules. However, time is running out and the bill is facing some opposition. Some view the measure as “double dipping” since the expenses can also be deducted, while others are concerned about the loss of state tax revenue.
If you thought having your PPP loan forgiven would be the end of the problem, facing a Massachusetts tax bill could be an unpleasant surprise. If you have questions about your PPP loan, which expenses are deductible, and how much you might be required to pay in taxes on the forgiven proceeds, please contact Gray, Gray & Gray at (781) 407-0300.