Important information on Utah’s State Tax policy for PPP Loan Forgiveness
If your PPP loan was forgiven in 2020, it will generate taxable income for your Utah State Income tax return. As part of the CARES Act, Congress implemented the Paycheck Protection Program (PPP). The PPP provided a forgivable loan to a business on the condition that it spends at least 60% of the loan on payroll expenses, and the remaining 40% on certain business expenses.
Typically, when a business receives loan forgiveness, it is treated as taxable income under Section 265 IRC. However, under the CARES Act, this income was treated as nontaxable for federal income tax purposes. As this income was nontaxable, the Treasury Department and the IRS ruled that expenses paid with PPP loans were not deductible.
As a response to this unintended impact on small businesses, President Trump signed HR 133 into law on December 27, 2020, which reversed the decision by the Treasury Department and the IRS. Thus, making the expenses paid with the PPP loan deductible.
With this last-minute legislation, the federal government waived taxes on PPP loans, but Utah is requiring businesses to pay taxes on the portions of PPP loans that have been forgiven. The Utah tax will be assessed in the year the loan is forgiven.
For Utah state income tax purposes, the result of the December action by Congress combined with the provisions of SB 6005, resulted in PPP expenses being fully deductible. Also, PPP forgiven loans will be added back to taxable income in the year and to the extent they are forgiven.
We are recommending that you contact your state legislators and let them know how taxing the PPP funds will impact your business. Please let them know how disappointed you are that the State of Utah is taxing the PPP Funds. Utah is one of the very few states in the country choosing to do this.
As a full-service accounting firm, Cook Martin Poulson has a broad range of tax and accounting professionals. In addition to income taxes and financial statement audits, our professionals can assist in specialized services such as Income Tax Services, Financial Statement Services, Business Valuations, business purchases and sales, 401k TPA services, and many more. Read more about Tax Provisions of the COVID-19 Relief Bill.