Loan income received under the Paycheck Protection Program (PPP) is not taxable income, regardless of whether the loan was forgiven or not. Forgiven PPP loans are not considered write-offs of debt income and, therefore, you should not report this loan income on your tax return. The IRS changed its mind and published three income procedures that offer taxpayers more options as to when they can recognize tax-exempt income resulting from the forgiveness of their Paycheck Protection Program (“PPP”) loans. This revenue procedure also provides guidance under section 1502 and Treasury Regulation 1.1502-32 with respect to the corresponding base adjustments for shares of subsidiary members of consolidated groups as a result of tax-exempt income derived from certain forgiven PPP loans, income from grants or subsidized payments of certain principal, interest and fees.
The Small Business Administration's Paycheck Protection Program (PPP) is providing an important lifesaver to help keep millions of small businesses and their employees open during the COVID-19 pandemic. Many borrowers will be forgiven these loans; eligibility for forgiveness requires using the loan for qualified purposes (such as payroll costs, mortgage interest payments, rent, and utilities) within a specific period of time. A forgiven loan generally qualifies as income. However, Congress decided to exempt forgiven PPP loans from federal income tax.
However, many states are still on track to tax them, either by treating forgiven loans as taxable income, denying the deduction for expenses paid for the use of forgiven loans, or both. The map and table below show states' tax treatment of forgiven PPP loans. Taxpayers can treat such income as received or accrued when (expenses eligible for forgiveness are paid or incurred), (a PPP loan forgiveness application is filed), or (PPP loan forgiveness is granted).