Is PPP loan forgiveness taxable income? (Includes state-by-state listing)

In this 4-minute read:

• Is the PPP loan taxable after it’s been forgiven?
• Are expenses for the PPP loan deductible with loan forgiveness?
• State-by-state listing for PPP forgiveness tax rules

The Paycheck Protection Program has helped tons of small businesses stay afloat over the course of the global coronavirus pandemic. And so long as your business met the basic requirements for loan forgiveness, your loan could even be fully forgiven. But are their tax implications to a forgiven PPP loan?

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Is the PPP loan taxable after it’s been forgiven?

The PPP loan itself is supposed to be completely tax-free on the federal level. This means that you don’t have to pay taxes on the funds you received from the loan whether they are forgiven or not. 

Generally, a forgiven business loan would become taxable income. However, in this circumstance, Congress opted for these funds to provide further benefit during an economically trying time—and so they are tax-free for federal purposes. In fact, the IRS has said not even to report your PPP loan on your federal tax returns so as to avoid confusion and accidentally facing an underpayment penalty for these funds over the course of the year. 

However, this doesn’t mean that your forgiven PPP loan is completely tax-exempt, depending on where you live. Certain states have chosen to tax forgiven PPP loans, so you’ll want to check with your tax professional and be aware of the laws around this in your state before you submit your state tax returns. Some states also won’t allow you to deduct your PPP loan expenses from your state taxes.

State-by-state listing of PPP forgiveness tax info

Note: These are the states that have explicitly made updates to their laws in regards to the PPP loan forgiveness and taxable income. These laws are subject to change according to your state’s government. Make sure to check the laws in your state before filing your state tax returns and consult a tax professional if you are unsure about your state’s laws. Womply intends this article for general informational purposes only and assumes no liability for the accuracy of any content.

Here are some of the current updates to state laws that we’ve been able to find:

• California: California has adopted the federal law for PPP loans and taxes with California Assembly Bill No. 80. This means that California is following federal guidelines for their PPP loan forgiveness taxes and is not taxing these funds

• Florida: PPP loan forgiveness is considered taxable income in Florida, however you can still deduct your business expenses from your state taxes

• Hawaii: According to Tax Information Release No. 2021-03 by the Department of Taxation in the State of Hawaii, businesses in Hawaii may not deduct expenses which were paid for by their PPP loan from their state taxes. But the forgiven PPP loan is otherwise tax-free

• Minnesota: As of May 20, 2021, the State of Minnesota has agreed to make forgiven PPP loans tax exempt (prior to this it was determined that this would still be taxable income)

• Nevada: Nevada will treat forgiven PPP loans as taxable gross income

• New Hampshire: Under the New Hampshire Business Profits Tax (BPT) statute, forgiven PPP loans will become taxable income and business expenses paid with PPP loans can be deducted

• North Carolina: In North Carolina, PPP loan forgiveness is not taxable income but you will not be able to deduct business expenses that were paid for by your PPP loans

• Ohio: The Ohio Conformity Bill has aligned their PPP loan forgiveness rules with federal laws, meaning forgiven PPP loans are tax-free and you can deduct your business expenses paid by your PPP loan from your taxes

• Texas: On May 8, 2021, Governor Abbott signed HB 1195, allowing forgiven PPP loans to be tax-exempt at the state level (previously it was included as taxable income under the Texas franchise tax)

• Utah: Forgiven PPP loans are taxable in Utah

• Vermont: PPP loans forgiven in 2020 are not taxable in Vermont since H.315 became law in April 2021. This new law means that PPP loans forgiven in 2021 will be taxable, and business expenses paid by PPP loans can still be deducted

• Virginia: Forgiven PPP loans are not taxable in Virginia, and you can deduct your business expenses paid by your PPP loans. However, you can only deduct up to $100,000 in expenses related to your PPP loans

Are expenses for the PPP loan deductible with loan forgiveness?

Under federal law, you can deduct business expenses paid for by your PPP loan from your federal taxes. At the state level though, this may vary between each state. Check our list above or review your state’s laws regarding PPP loan forgiveness and tax deductions before submitting your state taxes. 

Helpful resources after you’ve spent your PPP loans

• Which PPP forgiveness application should I use? Breakdown of Form 3508, 3508EZ, & 3508S
• What happens if my PPP loan is not forgiven? Repayment terms and next steps
• Do PPP loans affect business taxes and deductions? 

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