2020 Tax Update – State’s Choice on Deductibility for Paycheck Protection


Paycheck protection is a winding road in the area of tax. Now, the IRS actually officially opened its season on February 12th.

Most states all follow the actual federal guidelines for the Paycheck Protection Program. However, there are some states that are not following the federal steps for tax with regards to the Paycheck Protection Program. 

The Federal Guidelines for PPP Loans

The federal government’s position is that the PPP loan forgiveness is not taxable and the expenses that the PPP loan pays are deductible. 

For federal purposes, it is a gift because you’ve got money from the income and the loan forgiveness that you don’t have to report. It’s not taxable to you on your tax return. Then you get to deduct all the expenses that are paid, so that’s a win-win. 

But with these other states, the difference is that you are not going to get that non-taxable income no matter how you put it because there’s going to be a portion of the money that is not going to be deductible.

States Not Following the Federal Guidelines

  • First Category: California, Kentucky, North Carolina, and Wisconsin

Loan forgiveness is non-taxable, however, the expenses that the loan paid are not deductible. 

  • Second Category: Massachusetts, Minnesota, New Hampshire, and Utah

PPP loan forgiveness is taxable, which then assumes that the expenses are also deductible. 

  • Rogue states: New York and New Jersey

When you’re in one of those states, don’t freak out. 

If you’ve not yet taken advantage of the paycheck protection program, it’s not too late. You might want to consider talking to someone about doing so, because it’s an excellent program, especially for those who have been impacted by COVID-19.

The paycheck protection program has been able to help online businesses and other small business owners survive and be able to continue their businesses. 

So don’t let this deter or derail you – just start having conversations with your tax preparer and your accountant so you can both manage expectations. Understand that tax planning is important and that you are part of a partnership when you collaborate with people.

If you want to learn more about the tax update for PPP loans and loan forgiveness, check out Episode 043: 2020 Tax Update – State’s Choice on Deductibility For Paycheck Protection.