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Small-Business Relief Loans Could Face Some State Tax

Your Paycheck Protection Loan may be forgivable, but that doesn’t mean the funds are tax free. 

Debt forgiveness is a taxable benefit in some states, according to Bloomberg Tax. While the federal government said it will not tax the discharged debt, states will need to update their tax codes to provide similar forgiveness.

States like New York and Tennessee have “rolling conformity,” which means their tax codes automatically update to changes in the federal tax code. But unless other states move quickly, some of the largest states, including California, may tax the emergency benefit. As many as 30 states will need to update their tax laws to help small businesses retain their relief funds. 

Unfortunately, many state legislatures have shortened their sessions due to the pandemic, amending the tax laws in some states may require emergency sessions. Per Bloomberg, one congressional tax policy aide said that since businesses have to spend the loan funds on utilities, wages, rent, and mortgage, some firms might qualify for enough state deductions to offset taxes on a forgiven loan. However, it might not be enough to offset the tax burden for all businesses.