RALEIGH — A bill filed in the House of the North Carolina General Assembly is seeking to temporarily conform to federal tax codes on expense deductions for businesses who received federal Payment Protection Program loans, also known as PPP loans.
House Bill 334 outlines a temporary alignment of North Carolina tax treatment to that of the federal government. The bill’s primary sponsors are Rep. Ray Pickett (R-Ashe) and Rep. Jason Saine (R-Lincoln).
The changes would be only for the taxable years beginning on or after January 1, 2021. As of April 13, the bill is still moving through House committees.
“The PPP loan program is arguably one of the more successful things the federal government put forward during the pandemic,” said Saine in a statement to North State Journal. “By offering this opportunity for job providers to retain so many jobs and avoiding massive layoffs is what has allowed us to at least maintain some of the economic success under the Trump administration.”
Saine added that “following the Federal one-time tax forgiveness on these loans makes sense for North Carolina as we kick start our economy.”
Following passage of the CARES Act, PPP expense deductions were not originally allowable but federal guidance for those deductions changed by Dec. 2020. Businesses who received a PPP loan could now also to receive a deduction for expenses paid with their PPP tax-exempt income.
While Congress exempted forgiven PPP loans and expenses from federal taxes, there are around 20 states set to allow state taxes on forgiven PPP loans, including North Carolina.
PPP loans are part of the $150 billion Federal CARES Act. North Carolina’s share of the CARES Act was over $4 billion.
As of June 30, 2020, businesses in North Carolina received around $12.5 billion in PPP relief with an additional $290 billion issued thereafter. Roughly 85% of PPP loans to businesses in North Carolina have been forgiven.
According to the Small Business Administration as of March 28, 2020, there have been 72,312 PPP loans granted to North Carolina businesses for a total of over $4.25 billion in net dollars.
The fiscal note on House Bill 334 estimates conforming to the federal treatment of PPP loan expenses will end up being around $400 million.
In order for the PPP loan to be forgiven, at least 60% of the loan has to be used for payroll costs. The remaining 40% can be spent on the qualifying expenses including mortgage interest or rent, utility costs, and certain operational costs. Additional qualifying expenses can include uninsured property damage due to civil unrest, supplier costs on essential goods, and protection spending on workers for items like personal protective equipment.
While the loan is being used, employers must attempt in good faith to keep similar pre-pandemic employment and pay rates.
Small businesses with 500 or fewer employees are eligible for PPP loans. The most money that a business can borrow as a first-time PPP borrower is 2.5 times its average monthly payroll costs with a maximum limit of $10 million.