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Arkansas Excludes Forgiven PPP Loans From Income Tax

Posted on Mar. 5, 2021

The governor of Arkansas has signed a bill excluding forgiven Paycheck Protection Program loans from state income tax.

H.B. 1361, sponsored by Rep. Les Eaves (R) and a bipartisan group of legislators, was signed March 2 by Gov. Asa Hutchinson (R) as Act 248.

The act conforms the state to the federal tax treatment of forgiven PPP loans and other COVID-19 relief under the Consolidated Appropriations Act, 2021, (P.L. 116-260). That bill, enacted December 27, 2020, clarified that expenses paid for with PPP loans that are later forgiven are deductible.

The PPP was created under the federal Coronavirus Aid, Relief, and Economic Security Act, to encourage employers to keep paying workers amid the COVID-19 public health crisis. The loans will be forgiven by the Small Business Administration if specific requirements are met. 

The forgiven loans are not subject to tax at the federal level but there is less clarity about whether they are taxable at the state level. Arkansas now joins the majority of states that have excluded the forgiven loans from taxable income, according to research from the Tax Foundation.

The bill contains an emergency clause and therefore took effect upon the governor’s signature.

Hutchinson signed another emergency bill (S.B. 236) that will exclude unemployment insurance benefits from state income tax in calendar years 2020 and 2021.

The bill, sponsored by Sen. Jonathan Dismang (R) and a bipartisan group of legislators, was enacted March 1 as Act 154. It also took effect upon the governor’s signature.

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