Murphy, a Democrat, and State Treasurer Elizabeth Maher Muoio said forgiven PPP loans will be income tax exempt at the state level, and those who received the loans also can deduct business expenses paid with money from those tax-exempt loans.
The announcement doesn't need enabling legislation under existing authority, Murphy and Muoio said in a release. Therefore, expenses paid with the PPP loans will be deductible from state gross income tax and corporate business tax, and the forgiven loans can be excluded from taxation of those two taxes as well, a release said.
Generally, forgiven loans create canceled debt income. In the case of a PPP loan, the resulting tax increase is generally offset by deductible expenses paid for by the loan, such as wages. The Coronavirus Aid, Relief and Economic Stability Act
or CARES Act, excluded the loans from the cancellation of debt income and the Internal Revenue Service later required expense deductions to also be excluded. But under the Consolidated Appropriations Act passed in December, taxpayers are allowed to exclude forgiven loans from income and to deduct related expenses.The issue of PPP loan tax treatment is also being tackled in other states, though generally through legislative consideration of state tax conformity.
--Editing by Leah Bennett.
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