Federal Treatment of PPP Loans

The federal Coronavirus Aid, Relief, and Economic Security (CARES) Act established the Paycheck Protection Program (PPP) that provided loans to small businesses to pay certain business expenses. Under the CARES Act, a PPP loan recipient is eligible for loan forgiveness if the loan is spent by the recipient on certain payroll, mortgage interest, rent or utilities payments. The CARES Act also provides that any amount of cancelled indebtedness that would otherwise be includable in the federal gross income of the borrower under the Code for federal income tax purposes is excluded from federal gross income.

Subsequently, the federal Consolidated Appropriations Act of 2021 (CAA 2021), provided that PPP loan recipients may deduct expenses paid for using PPP loan amounts, even if the PPP loans are later forgiven.

District Treatment of PPP Loans

District gross income does not include PPP loans that are awarded and subsequently forgiven. D.C. Code § 47-1803.02(a)(2)(GG).

In computing net income, corporations, financial institutions, unincorporated businesses, and partnerships can deduct from gross income all ordinary and necessary expenses paid or incurred during the tax year in carrying on any trade or business. Any business expenses allowed are subject to the same limitations as provided in the Internal Revenue Code. D.C. Code § 47-1803.03(a)(1). Therefore, to the extent that these deductions for expenses paid using PPP loans are allowed by the Internal Revenue Code, the deductions will also be allowed to determine a taxpayer’s District taxable income.

For additional information, please contact OTR’s Customer Service Center at [email protected] or (202) 759-1946.