Forgivable PPP Loans May Have State Tax Implications for Michigan Businesses

by Scott McClallen

 

 

Michigan businesses can accept their forgiven pandemic loans without worrying about paying federal taxes, but it’s not yet clear if they’ll owe state taxes.

More than 121,000 Michigan businesses took federal forgivable Paycheck Protection Program (PPP) loans valued at approximately $15.7 billion.

After the Internal Revenue Service decided that the forgiven loans were taxable, Congress passed legislation in December exempting them from federal income taxes.

In 2021 alone, nearly 21,000 loans totaling $2.8 billion have kept Michigan businesses afloat.

Ron Leix, a public information officer at the Department of Treasury, said his department will follow the Internal Revenue Code (IRC) guidance on Paycheck Protection Program (PPP) loans.

“In other words, forgiveness of a PPP loan won’t be in your federal gross income and therefore won’t be in either Adjusted Gross Income or Federal Tax Information for purposes of the state of Michigan’s Individual Income Tax or Corporate Income Tax.

It will be part of Total Household Resources though, which may impact some credits.

Morgan Scarboro, manager of Tax Policy and an economist with Virginia-based government relations firm Multistate’s, explained why some states are taxing the loans while others aren’t.

“The baseline is that rolling conformity states will follow the IRC – forgiven PPP loans are not taxable, and expenses associated with the forgiven loan are deductible – unless the state legislature acts to decouple.

“For static conformity states, it is the opposite – forgiven PPP loans are taxable, or the expenses associated with the forgiven loan are nondeductible, or potentially both – unless the state acts to adopt the current IRC (and does not decouple from those specific sections in the process). However, additional analysis is required on a state by state basis as each state has slight differences in exactly how they couple to the IRC.”

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Scott McClallen is a staff writer covering Michigan and Minnesota for The Center Square. A graduate of Hillsdale College, his work has appeared on Forbes.com and FEE.org.