On its Tax Filing Season Frequently Asked Questions web page, the Massachusetts Department of Revenue (DOR) recently provided answers to some common questions regarding tax treatment and reporting of Paycheck Protection Program (PPP) forgiven loans and other Coronavirus related relief in the Commonwealth. The key takeaway under this guidance is that a PPP forgiven loan is includable as taxable income for taxpayers subject to the Massachusetts personal income tax, including those who report business income and expenses on their personal income tax return, however it is NOT taxable income for conventional C corporations.
With regard to PPP forgiven loans the DOR provides as follows:
- 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, Massachusetts follows the Internal Revenue Code as of 2005. Because the CARES Act provision that excludes the forgiveness of PPP loans from gross income was enacted after 2005, any amount forgiven under the CARES Act is includable in gross income and subject to tax, whether or not Form 1099-C, Cancellation of Debt, is issued by the lender.
- For taxpayers who report business income on a corporate excise return (Form 355, 355U, 355S or M-990T), Massachusetts follows the Code as currently in effect. Therefore, any amount forgiven for a corporate borrower would be excluded from Massachusetts gross income.
In addition to information on the taxability of PPP forgiven loans, the DOR also addresses Economic Injury Disaster Loan (EIDL) and other Coronavirus Relief Fund grants. Similar language as that for PPP forgiven loans is provided for EIDL grants, while the guidance for grants awarded by the Massachusetts Growth Capital Corporation (MGCC), the Commonwealth, or municipalities is as follows:
- Federal law requires that grants to businesses be included in gross income. The IRS has specifically stated that if governments use CARES Act Coronavirus Relief Fund payments to establish grant programs to support business, businesses receiving such grants must include the grant amount in their federal gross income. Because these grants are taxable under federal law, they are also taxable under Massachusetts law.
Other important information to know:
- The forgiveness of PPP loan proceeds should only be recognized in the year when all or a portion of the stated principal amount of your PPP loan is forgiven because you satisfy the forgiveness requirements.
- Because an S corporation’s 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. An S corporation with gross receipts totaling $6,000,000 or more is also subject to an entity-level excise. Forgiven PPP loan proceeds will be excluded from income for purposes of that calculation.
- Whether you are subject to the personal income tax or the corporate excise, business expenses paid with PPP loan or grant funds that can be deducted on your federal return can also be deducted on your Massachusetts return.
Please contact our office for more information.