Iowa Department of Revenue announces tax decisions on PPP loans

Recipients of loans in 2020 or later through the CARES Act’s Paycheck Protection Program that were forgiven and excluded from federal gross income will not pay taxes to Iowa on that income for tax year 2020 or later, the Department of Revenue announced Feb. 3.

In accordance with 2020 Iowa Acts, House File 2641, section 109, the state will also exclude income for forgiven PPP loans for fiscal-year taxpayers whose 2019 tax year ended after March 27, 2020.

Sections 276(a) and 278(a) of Division N of the federal Consolidated Appropriations Act, 2021, enacted on Dec. 27, 2020, ruled that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the income exclusion for forgiven PPP loans,” and Iowa subsequently ruled that taxpayers should treat any PPP loans and related expenses the same way as they would on federal tax returns.

“The guidance will state that Iowa fully conforms to the Consolidated Appropriations Act, 2021 for tax years beginning on or after January 1, 2020, meaning that taxpayers will be able to take all the same deductions for expenses paid with these loans for Iowa purposes as they can for federal purposes on their 2020 returns,” Iowa Department of Revenue Policy Director for Corporation Income Tax Ben Clough told The Center Square in an email.

“However, Iowa has not conformed to these changes for tax years beginning before January 1, 2020, so 2019 fiscal year filers will be required to follow the guidance issued by the IRS prior to the CAA, 2021, and will not be allowed to take deductions for business expenses paid using these loans,” Clough said.

“My answers are general ones based on the facts available to me and the laws in effect today, and may not account for every possible factual scenario. These answers are my own interpretations, and are not legally binding on the Department,” Clough said.

Taxpayers will not be able to deduct business expenses in tax year 2019 that were paid using forgiven, or “expected to be forgiven,” PPP loans and will need to follow IRS Notice 2020-32, Rev. Rul. 2020-27, and Rev. Proc. 2020-51, the Feb. 3 announcement stated.

Clough said in the email that the legislature is still considering changes on 2019 business expense deductions.

“I am aware of at least two bills that have already been proposed in attempt to ‘fix’ this issue for fiscal year 2019 filers by retroactively conforming to the CAA, 2021, treatment for these business expense deductions for 2019, but until one of those bills is signed into law, 2019 fiscal year filers should follow the Department’s guidance when completing their returns,” Clough said.

“The expenses that were paid for by the PPP program will still be able to be counted against your income reducing your taxable total,” America’s Small Business Development Center Iowa State Director Lisa Shimkat told The Center Square via email.

“This was good news for our small businesses in the state,” Shimkat continued.” I do recommend that all business owners that received a PPP or other type of federal or state assistance to reach out early to their tax preparer so that they can be sure to follow the rules that have been put in place.”

District Director of the Small Business Administration’s Iowa District Office Jayne Armstrong told The Center Square in a phone interview about the impact the PPP loans and related tax decisions had on small businesses in Iowa that have struggled during the COVID-19 pandemic.

“[L]looking at the ramifications of all this, there was a lot of concern that ‘Gee, are we going to be taxed for all this?’ And I think a lot of small businesses thought that that would just be insulting after everything because they are the heart of the economy and everything, and it would just be doing more damage to small businesses and their bottom line,” Armstrong said. “At the same time, there’s so much relief out there. At some point we’ve got to look at reining some of this.”

SMDC Iowa has posted information about PPP Second Draw Loans, which have an application period open through March 31.

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