Hawaii recently announced1 it will follow the obsolete revenue ruling2 issued last November and will continue to disallow deductions for expenses paid with forgiven Paycheck Protection Program (PPP) loans. On a federal level, the Internal Revenue Ruling 2020-27 provided that a recipient of PPP loan proceeds could not take deductions for expenses that would entitle the taxpayer to PPP loan forgiveness. The ruling also provided that deductions were not allowed even if the loan forgiveness was not expected until a future year. Even if the taxpayer had a “reasonable expectation” that the loan would be forgiven, deductions were not allowed. With the passing of the Consolidated Appropriations Act 2021 (CAA) on December 27, 2020, this revenue ruling became obsolete. This act provided that such expenses were deductible for federal purposes. Hawaii has to decouple from the CAA and has chosen to follow the obsolete revenue ruling for state income tax purposes.
Hawaii has taken the minority position among states that have issued guidance on the treatment of PPP loan proceeds and expenses. As of early May, only a handful of states—Florida, Minnesota, Nevada, New Hampshire, North Carolina, Texas, and Utah—are following the obsolete revenue ruling either by including the PPP loans in income or disallowing deductions for related expenses.
Ryan will continue to monitor developments among the states concerning the treatment of PPP loans.
1 Tax Information Release No. 2021-03 (May 10, 2021).
2 Internal Revenue Code Revenue Ruling No. 2020-27.
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