R.I. issues guidance for businesses filing taxes on PPP loans

THE R.I. SENATE has passed a bill that would raise the state's minimum wage to $15 per hour by 2025. / PBN FILE PHOTO/ARTISTIC IMAGES
THE R.I. DEPARTMENT OF REVENUE and Division of Taxation issued guidance on Monday for businesses that have to pay taxes on forgiven Paycheck Protection Program loans. /PBN FILE PHOTO/ARTISTIC IMAGES

PROVIDENCE – The R.I. Department of Revenue and Division of Taxation issued tax filing guidance on Monday for businesses that received Paycheck Protection Program loans greater than $250,000. About 2,000 Rhode Island businesses received PPP loans greater than that threshold.

While the guidance – included in a 17-page summary of tax changes recently enacted by the state – makes clear the PPP loans are not taxable at the federal level, the loans are taxable as income in Rhode Island for an amount over the $250,000 threshold. The $250,000 threshold is applied per PPP loan for businesses that have more than one loan.

For example, a Rhode Island business that received a $275,000 PPP loan is responsible for paying taxes to the state on the $25,000 that exceeds the threshold.

If a business received two PPP loans, one for $250,000 and another for $300,000, the business is not responsible for paying state taxes on the first loan because it is at the threshold and is responsible for paying taxes on the $50,000 above the threshold on the second loan.

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The summary notes the waiving of interest and penalties on the taxable portion of each PPP loan taxed under the corporate income tax, bank excise tax, and personal income tax, if taxes are paid in full prior to March 31, 2022. It does not address hardships or businesses that cannot meet the extended filing deadline.

Tax preparers told Providence Business News that the summary clarified some of the issues they had, but they still have concerns that need to be addressed.

“The PPP tax legislation highlights one of the reasons we pushed for penalty relief legislation, as Rhode Island has the highest penalty interest rate in the United States at 18%, said Melissa Travis, CEO and president of the Rhode Island Society of Certified Public Accountants and a leading advocate for the Rhode Island Business Coalition.

“Although the legislation amended the date for the taxable portion of each PPP loan to March 31 – it is not clear whether that extends to estimated payments and other taxes that may result from these changes,” she said. “Further, if a business is experiencing a hardship and cannot pay by the March deadline, will they be subject to the penalty rate after that date?”

Travis said that for many of the state’s businesses, penalties and accrual of interest rate charges can become insurmountable.

“We are hoping the General Assembly will consider hardship waivers or lowering the penalty interest rate for these businesses,” said Travis. “It was extremely disappointing that with the highest budget surplus in our history and the support of the administration, legislation to bring Rhode Island’s penalty interest rate for businesses in line with other states failed – but the proposal to tax PPP forgiveness was successful.”

Laura Yalanis, a partner at Kahn, Litwin, Renza & Co. Ltd. and director of the firm’s Tax Services Group, agreed. She said the summary appears to only waive the interest and penalties associated with tax owed on forgiveness that occurs on the 2020 tax return. Yalanis said the summary does not provide guidance for tax year 2021.

Those taxpayers for 2021 would effectively be subject to an 18% interest rate for an inability to pay their taxes on time, she said. “We would like to see the division extend the waiver of interest and penalties to encompass the 2021 estimated payment area as well,” she said.

Yalanis said tax preparers are hopeful that updated forms will be provided soon so that businesses and their accountants can comply with the new rules ahead of the Sept. 15 and Oct. 15 extended due dates.

The state’s corporate income taxes on PPP loans are due by Sept. 15, while personal income taxes are due by Oct. 15.

“The process to update tax programs includes work that needs to be done by technology companies and then a review and approval by the state that the software is accurate and compatible with the state system,” said Yalanis. “Until this process is complete, we have to hold off on filing any return that has forgiveness in excess of $250,000, and hold off on filing any amended returns that need to be updated for the additional income.”

Another item included in the summary is deductible expenses related to businesses that took PPP loans.

The summary states that on Jan. 6, the U.S. Treasury Department and IRS issued guidance allowing for deductions for both federal and state tax purposes on PPP loans.

Of the $2.6 billion in PPP loans that 30,000 of the state’s businesses received over two fiscal years, less than 2,000 companies, or an estimated 5% of the total, are taxed on loans greater than $250,000. That estimate is according to R.I. House Speaker K. Joseph Shekarchi.

During the legislative session that ended June 30, leaders of the Rhode Island business community were railing against taxing of PPP loans, calling them unconstitutional and asking that they not be considered taxable. Gov. Daniel J. McKee, who supported taxation, stressed that only a small percentage of businesses that received the loans would be taxed.

The R.I. Division of Taxation is planning on providing forms and instructions for businesses and their accountants by early fall to coincide with the extended filing due dates of Sept. 15 and Oct. 15.

The division said it will officially start meeting with the state’s tax professionals in September and continue holding periodic meetings.

The division noted that it plans to provide further guidance about how to comply with the new law and its provisions.

The 17-page legislative changes summary can be found here: http://www.tax.ri.gov/reports/Summary_of_Legislative_Changes_07_26_21_final.pdf

Cassius Shuman is a PBN staff writer. Contact him at Shuman@PBN.com. You may also follow him on Twitter @CassiusShuman.

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