Paycheck Protection and Other Similar Loan Forgiveness Programs - Mass Tax Implications

William Delaney, EA
Westwood, MA

 What happens if a taxpayer files for “PPP Loan Forgiveness” and is approved.  We know that (as of this moment in time) the forgiven amount is federal taxable income because Congress did not say otherwise (and thereby amend the federal Code). 

We also know that the cash, at the time of receipt, was not considered to be taxable income.  It was a bank loan to be repaid, so there was no need to record income, nor were there any restrictions on deducting expenses paid from that income source (how you go about tracing the activity is a question for another day).

Now comes our friendly SBA Administration and we assume that it approves our form 3508 application and forgives $10,000 of that loan!  We are left with the need to remove $10,000 from the liability account on the balance sheet – Bank Loan Payable.  Perhaps it is the entire amount; perhaps not, but the principle is the same.  Leave it to the IRS to gum up the works when they declared (IRS Notice 2020-32) that they would not allow the expense deductions associated with that money.  How do you trace it so that you don’t deduct it.  Rather than subscribe to the Theatre of the Absurd, I suggest that you make a simple bookkeeping entry (assuming the loan forgiveness is NOT taxable)…

 

Dr.  Bank Loan Payable               $ 10,000

   Cr.  Disallowed Expenses                                $ 10,000

 

Without the need to specifically identify, the bottom line has been adjusted and taxable income is properly calculated.  End of story?  Ah, not so fast…

What happens in MA???  See MA TIR 20-09 (7/13/20).  You guessed it…we have a different rule!  Since MA follows the federal Code as of 1/1/2005, there is no federal CARES Act.  The PPP program doesn’t exist.  As a result, “…any amount forgiven under §1106 of the (CARES) Act is includible in gross income and subject to tax, and there is no disallowance of deductions…” 

Therefore, the MA bookkeeping entry would be…

 

Dr. Bank Loan Payable                $  10,000

  Cr. Debt Forgiveness Income                             $ 10,000

 

Meanwhile, if the Congress does NOT decide to recognize the forgiveness as tax free, your federal bookkeeping entry would be the same as the above MA entry.

So, now we’ve nailed this thing!  Right?  Nope---wrong!  The above rule applies only to personal income tax.  It does not apply to the corporate excise tax, since MA follows the federal Code currently in effect (with exceptions) for purposes of corporate taxation.  The MA rule for forgiveness of corporate debt is…

“…any amount forgiven for a corporate borrower under §1106 of the (CARES) Act would be excluded from Massachusetts gross income, and any deductions disallowed in accordance with IRS Notice 2020-32 would likewise be disallowed for Massachusetts tax purposes.”

Therefore, our corporate bookkeeping entry would be (assuming federal forgiveness)…

 

Dr.  Bank Loan Payable                 $ 10,000

  Cr.  Disallowed Expense                                   $ 10,000   

 

Otherwise, the federal recognition of corporate debt forgiveness income would apply as well to the state corporate return and the bookkeeping entry would be…

 

Dr. Bank Loan Payable                 $ 10,000

  Cr. Debt Forgiveness Income                            $ 10,000

 

Now we have it, at least until/unless they change it.