Several states are proposing to conform to the business income tax relief recently adopted at the federal level.
Georgia H.B. 265, signed into law February 25 by Gov. Brian Kemp (R), conforms the state's tax code to the IRC as of January 1, 2021. That includes the federal Consolidated Appropriations Act, 2021 (P.L. 116-260), which clarified that business expenses paid for with forgiven Paycheck Protection Program loans are deductible.
H.B. 265, sponsored by Rep. David Knight (R) and other Republicans, passed the Senate February 24 by a vote of 53 to 0, after passing the House February 9 by a vote of 166 to 0.
Georgia has conformed to the Coronavirus Aid, Relief, and Economic Security Act for tax years beginning on or after January 1, 2019, but legislation signed into law in June 2020 decoupled from changes to net operating losses and excess business losses in the CARES Act.
H.B. 265 would adopt other federal income tax changes related to itemized deductions for charitable contributions, low-income housing tax credits, business meal deductions, and itemized deductions for unreimbursed medical expenses.
The changes are expected to reduce state revenues by about $254 million from the 2020 tax year through the 2025 tax year, according to a summary from the state Department of Revenue.
The Arkansas legislature also recently passed IRC conformity legislation, under which forgiven PPP loans would be exempt from the state income tax. H.B. 1361 passed the Senate February 25 after passing the House February 22 and now heads to the desk of Gov. Asa Hutchinson (R). In his weekly radio address February 26, the governor said he would sign the bill.
The legislation would also exclude from state taxation Small Business Administration grants under the Economic Injury Disaster Loan program, and payments received under the Coronavirus Food Assistance Program.
Expenses paid for with forgiven PPP loans would be deductible under the bill, and deductions would also be allowed for expenses incurred using Economic Injury Disaster Loan grants and Coronavirus Food Assistance Program funds.
Rep. Les Eaves (R), one sponsor of H.B. 1361, told Tax Notes that the Department of Finance Administration projected a revenue loss of $212 million over a period of two years, but noted that he and some other lawmakers believe there would be no revenue impact because the revenues were never included in revenue forecasts or the state budget.
“Businesses are still struggling, and our current law did not conform to federal law, so if we did not act, we would end up taxing that lifeline for businesses,” Eaves said.
Eaves said there are quite a few tax bills sitting in the House Revenue and Taxation Committee, of which he is a member, but that legislators want to wait and see where the state is revenue-wise before passing additional tax relief.
Another bill sent to Hutchinson for his signature is S.B. 236, sponsored by Sen. Jonathan Dismang (R). The bill would exempt unemployment insurance benefits from state tax. Hutchinson spokesperson Katie Beck said the governor plans to sign S.B. 236 as well as H.B. 1361.
Matthew Boch, member at Dover Dixon Horne PLLC, told Tax Notes that H.B. 1361 and S.B. 236 needed to run early in the legislative session since the changes would affect returns that are being filed this season.
Meanwhile, West Virginia Gov. Jim Justice (R) signed H.B. 2358 and H.B. 2359 into law February 24, which adopted federal individual and corporate income tax changes, respectively, that were made between December 31, 2019, and January 1, 2021.
In doing so, the state ensured that PPP loans won’t be subject to income tax, according to the Tax Foundation.
Katherine Loughead, senior policy analyst at the Tax Foundation, told Tax Notes that in addition to allowing forgiven PPP loans to be excluded from taxable income, the West Virginia bills “bring the state into conformity with the CARES Act’s treatment of NOLs, business interest expenses, and other CARES Act updates to sections of the IRC to which the state has historically conformed.”
Loughead also said that since Arkansas uses selective conformity, H.B. 1361 would allow expenses covered with forgiven PPP loans to be deducted, but it doesn’t bring in all the federal changes made in 2020.
She also said that “the West Virginia and Georgia laws and the Arkansas bill all address the tax treatment of forgiven PPP loans, which is part of a trend in states updating their conformity statutes to tackle the PPP issue and to align with certain other federal tax changes designed to provide relief.”