Legislation introduced in New York state would exempt from income taxation loan expenses forgiven under the federal Paycheck Protection Program.
S. 9037 was introduced October 9 by Sen. Anna M. Kaplan (D), chair of the Commerce, Economic Development, and Small Business Committee. The bill specifies that loan expenses forgiven under the PPP are excluded from the adjusted gross income of small businesses.
Kaplan's communication director, Sean Ross Collins, told Tax Notes October 13 that the legislation arose after the committee held a roundtable event on the COVID-19 pandemic's effect on minority and women-owned business enterprises. Collins said attendees expressed concern about the tax liability related to PPP loans.
The PPP was created under the federal Coronavirus Aid, Recovery, and Economic Security Act (P.L. 116-136), with the goal of encouraging employers to continue paying workers during the pandemic.
According to a sponsor memorandum for S. 9037, the CARES Act explicitly stated that the “loans that were converted should not be considered as income, and therefore taxes should not be paid on it.” However, the memo continued, “the IRS in a determination went against the legislation and has declared converted loans as income, which has caused conflict with the original intent and scope of the law.”
Arkansas and Virginia also recently introduced legislation to prevent loans forgiven under the PPP from being taxed.
And California Gov. Gavin Newsom (D) signed legislation September 9 that excludes forgiven loans from being treated as taxable income under that state's law. The bill also prevents businesses from using the business expense deduction for expenses that were paid for using forgiven PPP loans.
S. 9037, which has been referred to the Senate Rules Committee, would take effect immediately on enactment and would apply to tax years beginning on or after January 1, 2020.