![]() ![]() There are several important tax considerations for individual or corporate borrowers of PPP loans subject to the income tax under the Michigan Income Tax Act. The Paycheck Protection Program (PPP) and the Michigan Income Tax Act In other words, all PPP loans will receive the federal tax treatment authorized under the CAA. Section 276(a) was specifically intended to clarify the original intent of the PPP loan program and was applicable to all taxable years ending after the date of the original enactment of the CARES Act, but the provisions of the CAA also apply to all future PPP loans. The CAA therefore clarified that the amount of the forgiven loan must be excluded from gross income of the taxpayer and all expenses required to be paid from the loan proceeds remain fully deductible on the federal return. (2) no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided by paragraph (1). by reason of forgiveness of indebtedness described in clause (ii) of such subparagraph, (1) no amount shall be included in the gross income of an eligible entity. Section 276 of the CAA provided, in relevant part:įor purposes of the Internal Revenue Code of 1986, In response, Congress clarified the intended tax treatment of PPP loans by enshrining the exclusion from gross income and the deductibility of all expenses through the Consolidated Appropriations Act (CAA), enacted on December 27, 2020. Therefore, under the original program implemented under the CARES Act, the forgiveness of the loan was not included in gross income, but otherwise deductible business expenses paid by that loan were no longer deductible on the federal return. Because the Internal Revenue Code (IRC) generally prohibits a deduction for expenses related to tax-exempt income, the IRS, through Notice 2020-32, held that taxpayers could not deduct otherwise deductible business expenses to the extent that the payment of such expenses resulted in the forgiveness of a PPP loan. īut, while Section 1105(i) held that forgiven PPP loans were excluded from gross income, no similar provision was enacted authorizing a deduction of the business expenses paid for by those forgiven loans. Taxability.- Canceled indebtedness under this section shall be excluded from gross income for purposes of the Internal Revenue Code of 1986.Section 1105(i) of the CARES Act provided: For borrowers that use the loan proceeds to pay those qualified expenses, the borrower is eligible for complete or partial forgiveness of the loan.Īs originally enacted, any loan forgiven under the program was specifically excluded from gross income for federal income tax purposes. Under the program, eligible borrowers can apply for and receive federally guaranteed loans to be used for the payment of payroll and certain other qualified business expenses. The Paycheck Protection Program (PPP) was originally created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted March 27, 2020, to provide cash flow assistance to small businesses impacted by the COVID-19 pandemic. Overview of the Paycheck Protection Program This notice outlines the State of Michigan's conformity to the federal income tax treatment of loans issued under the Paycheck Protection Program and provides additional guidance the various income tax issues raised by the federal loan program.
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