When the coronavirus pandemic hit the United States in the early months of 2020, many small businesses ground to a halt as customers stayed home and did not dine out or shop the way that they previously had. Small businesses lost much of their income, but they still had expenses—such as rent, utilities, and, often, payroll. Paycheck Protection Program (PPP) loans were one of the ways in which the federal government attempted to offer relief to these businesses, but, as with many government programs impacting taxation, PPP loans have come with their fair share of confusion. Indiana small businesses that received these loans need be aware of the potential tax impacts of PPP forgiveness in Indiana.
The PPP includes a loan program administered by the US Small Business Administration (SBA) under § 7(a) of the Small Business Act, 15 U.S.C. § 636(a). During its effective dates, the PPP provided almost $800 billion in forgivable loans, and close to $278 billion of that amount was provided in the first five months of 2021, before the PPP ended on May 31, 2021. Almost $4.5 billion in PPP loans were provided in Indiana alone.
Small Business Income Tax Returns and PPP Forgiveness in Indiana
The PPP provided forgivable loans to small businesses. These loans were designed to enable small business to meet their operating expenses such as payroll and rent. The PPP loans were tracked, and the intent was that the loan would be forgiven if funds were used properly.
In the Consolidated Appropriations Act of 2021, the federal government provided that the forgiveness of a PPP loan did not constitute taxable income to the loan recipient and that the operating expenses of the business paid with the borrowed funds would be tax-deductible.
Indiana State Law Follows Federal PPP Laws
More than 20 states automatically follow changes in federal tax law—a practice known as “rolling conformity.” In other states, state-level legislation is required to conform to federal law changes. Indiana is one of the latter states, using a practice known as “static conformity.” In Indiana, the state assembly conformed to the PPP forgiveness legislation during its 2021 legislative session.
The Indiana Department of Revenue (DOR) provides guidance on how PPP forgiveness in Indiana should be treated for income tax purposes. The DOR website confirms that PPP loan amounts shall be treated as tax exempt income and any expenses paid for by the loan will be fully deductible.
PPP Loan Forgiveness in Indiana—Treatment on 2020 or 2021 Returns?
In 2020, under the CARES Act, a taxpayer could offset up to 100 percent of income with net operating losses (NOLs) and also carry back a NOL for up to five years. The rules for forgiveness of PPP loans in 2021 changed such that NOLs can only offset 80 percent of income and cannot be carried back. Thus, small business operators usually had an advantage if they took losses in the year 2020 because of the more liberal rules then in effect.
Most Recent Federal Guidance on PPP Loan Forgiveness
In November 2021, the IRS issued guidance providing that most businesses that took a PPP loan could elect whether to deduct the expenses on a 2020 tax return, if they did not already, or on their 2021 return. This recent IRS procedure clarified when taxpayers could elect to treat the tax-exempt income depending on the timing of the expenses at issue, the timing of their application for a PPP loan, and the timing of the grant of PPP loan forgiveness.
How Do I Report PPP Forgiveness on My Taxes?
Understanding how to report PPP loan information on your tax return and claim-related deductions is important to maximizing those deductions while fulfilling your tax duties to the IRS. How you report PPP forgiveness and claim deductions on your federal and state tax returns may vary depending on when you received a PPP loan, when your loan was forgiven, and more. To ensure that you are filing all necessary information as required—and to your maximum benefit—it is wise to consult with an experienced Indiana tax attorney.
An Indiana Tax Attorney for Businesses Who Obtained PPP Loans
PPP loan forgiveness brings with it several considerations regarding tax matters for small businesses and treatment of the loan forgiveness, including when to treat forgiveness as having occurred for purposes of income tax returns.
Carmel Fishers tax lawyer Julie A. Camden of Camden & Meridew, P.C. keeps up-to-date on the federal and state laws affecting income tax and tax returns, such as Paycheck Protection Program loans, and understands how PPP forgiveness in Indiana impacts businesses. For a consultation to discuss how a PPP loan may affect your business tax return, call 317-770-0000 or complete the firm’s online contact form.