Uncertain PPP Taxation for State Taxes

In late December 2020, taxpayers received resolution that they would not only be exempt from Federal taxes on PPP forgiveness, but also be allowed to deduct the expenses incurred to obtain that forgiveness.  Unfortunately, that legislation does not dictate state treatment.  Each year the Commonwealth of Virginia and other states determine their conformity with Federal law through a legislative process.  Last weekend the Virginia General Assembly voted to allow businesses and individuals to deduct up to $100,000 of expenses covered by the Paycheck Protection Program and the Rebuild VA grants.  For  PPP loans more than $100,000, Virginia taxable income will be increased.  This legislation has not been signed by Governor Northam, and he may not do so before next week.  Subsequent to the enactment of this legislation, the Virginia Department of Taxation will issue guidance on how to present the adjustments on Virginia income tax returns.  The Department of Taxation will also update their filing systems for these new additions and deductions, significantly delaying the ability to electronically file entity tax returns with the Commonwealth.

Further complicating matters, we are closely monitoring the tax conformity of other states.  Each state can be different in their treatment effecting taxpayers with multiple state filing requirements.

With resolutions occurring just before the filing deadline, there is high likelihood that partnership and S-corporation returns due March 15, 2021 and recipients of  PPP loans or Rebuild VA grants will have to be extended.

Employee Retention Credit (ERC)

In late December, legislation was enacted to allow qualifying businesses that also received  PPP loans to obtain the employee retention credit.  Many businesses are now assessing if they qualify for the credit during 2020 and apply for it retroactively by amending their 941 quarterly filings.   If received, the credit must reduce deductible payroll expenses.  Taxpayers that will receive the ERC credit for wages paid during 2020 may be required to record a receivable for the credit and correspondingly reduce payroll expense for the same period in which the wages were earned.  These calculations can be complex and time-consuming; yet another reason why tax filings may be delayed.

What we are doing?

We are monitoring the situation closely and will keep you up-to-date as legislation and  unfolds.  Please know we are eager to file your returns.  But filing before legislation is finalized and guidance is available will create additional fees for amended returns.  We understand that you have questions about these programs.  We’re accumulating all of our resources, webinars and articles on our webpage to provide our clients a single place for COVID support information.   We’ve also created a dedicated team of professionals that are advising on COVID related tax credits and programs.  As we wait for guidance and legislation, we can provide consultations for tax credits and assistance with PPP forgiveness or qualification for additional PPP funding.  As always, we’re here to assist your organization in this time of need and we thank you for your continued patience as we navigate these complexities.