PROVIDENCE – Already-strained state coffers won’t get any help from new tax guidelines on forgivable Paycheck Protection Program loans but businesses will benefit.
Rhode Island will follow federal guidelines set forth in the Coronavirus Response and Relief Supplemental Appropriations Act attached to the December stimulus bill, which exempt PPP recipients who have been approved for loan forgiveness from paying taxes on those loans, Paul L. Dion, chief of the R.I. Office of Revenue Analysis, said in a Senate Finance Committee hearing on Thursday. The state will also follow federal guidelines that let business owners deduct expenses paid with these loans from their income. This goes against longstanding Internal Revenue Service regulations that subject loans to taxable income and prevent expenses paid for with loans from being deducted from other, taxable income, Dion said.
Meet Amgen Women Leaders in Science
Join us for an enlightening forum featuring Alli Ferguson and Satpal Kundra, two distinguished women…
Learn More
While that’s good news for business owners, who will not have to pay state or federal income taxes on the forgivable portion of their payroll loans, the state will miss out on “tens of millions of dollars” in tax revenue, according to projections by the R.I. Department of Revenue.
“When I say tens of millions here, I don’t mean $15 [million] I mean close to $100 [million,]” Dion said.
Exactly how much revenue the state will lose out on based on losses in personal income and business corporation tax depends on how many state PPP loan recipients qualify for forgiveness and how much it reduces their net income thanks to the tax deductions. More precise estimates won’t be available until 2020 taxes are filed, Dion said.
Of the $1.9 billion in loans approved for Rhode Island applicants in 2020, $1.7 billion went to for-profit, tax entities (nonprofits that do not pay these taxes anyway also received a small portion of the loans). Assuming all $1.7 billion in taxable loans is forgiven and deducted against other taxable income, the state would lose “tens of millions of dollars” in fiscal 2021, according to DOR projections.
Another loss of similar consequences could come under the latest round of PPP funding which began earlier this month. Based on new requirements of the program and participation in first-round funding, the R.I. Office of Revenue Analysis projected state applicants will receive $1 billion in second-round funding, including $932 million for taxable entities. If that full $932 million amount is again entirely forgiven – meaning everyone who receives loans follows the rules for forgiveness – and deducted from taxable income, the state will take another hit in fiscal 2022 equal to “tens of millions of dollars,” though slightly less than the impact in fiscal 2021.
These losses were not included in the November revenue estimating conference, which were made prior to the latest stimulus bill passage At that time, the state projected $1.5 billion in personal income tax revenue and $458 million in business tax revenue in fiscal 2021, and $1.4 billion in personal income tax revenue and $470 million in business tax revenues in fiscal 2022.
The presentation to the Senate Finance Committee on Thursday confirms what local accountants already suspected and were advising their clients to prepare for in terms of how the state would follow federal guidelines for taxing forgivable PPP loans.
Anthony Mangiarelli, a partner and director of enterprise solutions for Kahn, Litwin Renza & Co. Ltd., said his firm has been advising clients to prepare for both scenarios, but anticipated the state tax policies would follow those at the federal level since Rhode Island is a “rolling conformity” state – meaning it does whatever the Internal Revenue Code dictates.
While a “lion’s share” – roughly 80% – of KLR’s clients with PPP loans have not yet applied for or received forgiveness on their loans, Mangiarelli stressed the importance of having that clarity prior to tax-filing season.
Other states, including neighboring Massachusetts, have issued separate guidelines indicating they may tax all or part of forgivable PPP loans.
(RECASTS first paragraph to include benefit to businesses.)
