In response to lobbying by NCACPA’s Advocacy volunteer leaders and staff, the N.C. Department of Revenue will issue revised guidance this week to clarify when taxpayers should add back expenses paid using the proceeds of a forgiven Paycheck Protection Program (PPP) loan.
The timing of the addback of expenses has been the subject of questions and concerns raised by NCACPA members on our Connect platform, especially after Congress passed legislation in December ensuring that such expenses would be deductible at the federal level.
HB 1080 (S.L. 2020-58) excludes the amount of PPP loan forgiveness from state income tax but does not conform to federal law regarding deductibility of expenses paid using the proceeds of the forgiven loan.
NCDOR plans to add the following new language to its Paycheck Protection Program webpage:
“A taxpayer that received a covered loan guaranteed under the PPP and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the CARES Act may not deduct those expenses for N.C. income tax purposes in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.“
The revised guidance will also include the following example:
“Example 4: Taxpayer is a sole proprietor that receives a PPP loan and uses the loan to pay employee wages. In November 2020, pursuant to the terms of section 1106 of the CARES Act, Taxpayer applied to the PPP lender for forgiveness of the covered loan on the basis of the eligible expenses it paid during the covered period. At that time, and based on Taxpayer’s payment of the eligible expenses, Taxpayer satisfied all requirements under section 1106 of the CARES Act for forgiveness of the covered loan. The PPP lender does not inform Taxpayer whether the loan will be forgiven before the end of 2020. On Taxpayer’s 2020 N.C. individual income tax return, Taxpayer is required to make an addition for the amount of the business expenses deducted on Taxpayer’s federal return that were paid with the PPP loan proceeds because at the end of the taxable year Taxpayer reasonably expects to receive forgiveness of the covered loan.“
NCDOR intends to send an e-alert to notify subscribers of the website update.
If you have questions about this or other policy issues, please contact NCACPA Director of Advocacy Robert Broome, CAE.