David E. Fontes serves as a principal and certified public accountant at CliftonLarsonAllen LLP with more than 16 years of public accounting experience. He spoke with PBN about the state taxation of Paycheck Protection Program loans and what small businesses need to know.
PBN: What are your main takeaways from the guidance the state issued on PPP loan taxation?
Fontes: The guidance makes PPP loan forgiveness income taxable for tax years beginning on January 1, 2020. The tax applies to corporate income, bank excise and personal income taxes, and will only impact businesses that received PPP loan forgiveness in excess of $250,000. Of the approximately 30,000 Rhode Island businesses that received funding through the Paycheck Protection Program, lawmakers say only around 2,000 businesses will ultimately be impacted by this tax. Impacted businesses must pay their tax in full by March 31, 2022 in order to avoid interest and penalties.
PBN: What additional clarity is needed from a tax perspective?
Fontes: The business community will require a good amount of additional guidance, both from the federal government and the state, in order to comply with this tax. For now, the most pressing questions apply to timing. More specifically, businesses are awaiting clarity from the federal government as to when they need to recognize PPP loan forgiveness income, and they need clarity from the Rhode Island Division of Taxation as to when it needs to be reported.
The Rhode Island Division of Taxation is advising taxpayers who opted to file for extensions during this past filing season (extending their deadlines to Sept. 15, 2021 for passthrough entities, or Oct. 15, 2021 for individuals and C-corporations) to hold off on filing their returns until additional guidance is issued. But there are plenty of taxpayers who already filed their returns for 2020.
For those taxpayers, the question becomes: What’s next? Will they need to amend their previously filed return to include their taxable PPP income? Will the state issue a supplemental form rather than asking impacted taxpayers to go through the full amendment process? We expect those questions to be answered as additional guidance is finalized, but – clearly – there is a fair share of uncertainty as of this writing.
PBN:What should businesses that received PPP loans that are going to be taxed do now to prepare?
Fontes: Any Rhode Island business that received a PPP loan of $250,000 or more should reach out to their team of tax and financial advisers to begin the process of modeling their potential tax liability. These businesses should also update their budgets to reflect the cash expenditure they’ll need to pay by the March 31, 2022 deadline.
Completing these back-office “housekeeping” tasks now while we wait for additional guidance to be drafted and issued will help impacted businesses be more prepared when the time comes to actually file and pay these taxes.
PBN: How do you anticipate this policy will change or create more demand for accounting services in the next tax filing season?
Fontes: For the businesses impacted by this policy, it’ll be another hurdle in a tax filing year that was already going to be a bit more complicated than usual. Putting aside the Rhode Island-specific PPP tax, businesses are also currently navigating uncertainty in terms of when to recognize income generated through the PPP or other financial relief initiatives. To this point, there has been no clear federal guidance as to whether this income should be recognized as soon as the Small Business Administration formally issues forgiveness, or if it should be recognized as the qualifying expenditures such as payroll, mortgage interest, rent, utilities, covered operation expenditures, covered property damage, covered supplier costs and covered worker protection are incurred.
The most important step businesses can take during this period is to ensure they are keeping details, comprehensive records while they await further guidance.
PBN: Are there any other particular legislative changes that small businesses should be aware of?
Fontes: The tax on PPP loans was certainly the highlight of this year’s budget hearings, but there were plenty of other important changes and updates that could impact the business community.
A few notable items include:
· Real Estate Conveyance Tax: This tax was expanded to include a $2.30 per $500 surcharge on real estate sales that exceed an $800,000 price. This tax applies to sales of real estate and is collected by cities and towns, and is effective for sales after January 1, 2022. There is an exemption with respect to affordable housing developments.
· Extended Tax Credits: Several popular state tax incentives were extended, including the Wavemaker Fellowship, Rebuild Rhode Island Tax Credits and Qualified Jobs credits (all extended through Dec. 31, 2022); and Historic Preservation tax credits (extended through June 30, 2022).
The Division of Taxation released a full summary report of this year’s tax-related legislative changes, which can be found by clicking here.
Nancy Lavin is a staff writer for PBN. Contact her at Lavin@PBN.com.