Forget Uncle Sam, beware of the Texas Comptroller! | Free human rights

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Many taxpayers have been affected by the COVID-19 pandemic. In the corporate sector, many small business taxpayers have been forced to apply for loans under the Paycheck Protection Program (“PPP”) in an effort to overcome the effect of the crisis on their businesses and their employees. Additionally, taxpayers can literally stumble upon the amount of guidance, legislation, and information circulating (and changing) in the ether regarding the use and remittance of their PPP loans. The largely unanswered question has been: how will different tax agencies handle PPP loans that are canceled and / or expenses paid or incurred as a result of PPP loans? While taxpayers may get more clarity from the federal government, it’s still unclear how Texas will answer this question.

Federal tax consequences of PPPs

The US Congress recently clarified the tax treatment (for federal purposes) of the cancellation of PPP loans and the deductibility of related business expenses. The last year has seen a relative evolution in the tax treatment of these unique objects. Recently, the Internal Revenue Service released Tax Decision 2020-27. This tax ruling sought to resolve the issue of whether a taxpayer who received a PPP loan could then deduct the expenses he paid during the year if he “reasonably expected” to receive a forgiveness of the loan. PPP. Simply put, taxpayers would not get a tax deduction for such expenses. For more information on Tax Decision 2020-27, see the following Insight blog: Treasury warns against deductions linked to PPP funds.[1]

At the eleventh hour of 2020, the federal government enacted the Consolidated Appropriations Act – the United States House of Representatives and the United States Senate passed the bill on December 21, 2020, and former President Trump signed the bill. of law on December 27, 2020.[2] Among its provisions, the relief bill clarified the federal tax treatment of PPP loans:

SECOND. 278. CLARIFICATION OF THE TAX TREATMENT OF CERTAIN LOAN REMISSIONS AND OTHER FINANCIAL ASSISTANCE TO ENTERPRISES.

(a) Administration of the United States Treasury Program. — For the purposes of the Internal Revenue Code of 1986—

(1) no amount shall be included in a borrower’s gross income due to debt forgiveness described in section 1109 (d) (2) (D) of the CARES Act,

(2) no deduction will be refused, no tax attribute will be reduced, and no base increase will be refused, due to the exclusion of gross income provided for in subsection (1). . . .[3]

Therefore, the recent reform of the US Congress emphasizes that, for federal tax purposes: (1) canceled PPP loans will not be included in a taxpayer’s gross income, and (2) deductions incurred and paid by a taxpayer due to PPP loans will not be refused if these PPP loans are canceled.

State Tax Consequences of PPPs (Texas)

Governments across the country are grappling with the tax consequences of PPP loans and related business activities. Simply put, there has been a lot of uncertainty. Currently in Texas, the franchise tax may weigh on taxpayers for the 2021 reporting season. Texas has yet to act (and act quickly) on the same issues recently addressed by the federal government.

In a recent tax policy update, the Texas Comptroller’s Office suggested that PPP loans that were ultimately canceled would be included in income for franchise tax purposes. This is an obvious departure from the way the federal government treats canceled P3 loans for federal tax purposes. Section 171.1011 of the Texas Tax Code outlines how “total income” is determined for franchise tax purposes. Total revenues, in large part, are based on amounts reported on a company’s federal income tax return.[4] In addition, deductions from the cost of goods sold (determined under Tex. Tax Code Ann. § 171.1012) and offset deductions (determined under Tex. Tax Code Ann. § 171.1013) would also be liable to be affected. . This is because Texas taxpayers could end up with a higher taxable margin for franchise tax purposes.

HB 1195 & SB 372

Likely in response to recent news from the Texas Comptroller’s Office, Texas Representative Charlie Geren (R-District 99) presented HB 1195 on January 19, 2021. Two days later, on January 21, 2021, Texas Senator Kelly Hancock (R-District 9) introduced SB 372, which mirrors the language of HB 1195.

The relevant wording of the bills indicates, in part:

SECTION 1. Article 171.1011 of the Tax Code is amended by adding paragraph (y) to read as follows:

(y) The total income does not include any loan amount canceled under the paycheck protection program, as provided for in Article 1106 of the Law on Aid, Relief and Economic Security against coronavirus, as amended by the Paycheck Protection Program Flexibility Act. Eligible expenses paid with this loan proceeds may be included in determining the cost of goods sold under section 171.1012 or in determining compensation under section 171.1013.[5]

Additionally, the Bills make it clear that while the change typically takes effect on September 1, 2021, the section 171.1011 change only applies to Texas franchise tax returns originally due on or after January 1. 2021.[6]

Conclusion

Notably, the bills recently introduced by Representative Geren and Senator Hancock create relative parity between the federal government and the Texas government, at least in terms of their treatment of canceled P3 loans and related business deductions. These bills, if passed, will prevent a possible boost to Texas taxpayers, especially small business owners. These mom-and-pop stores can breathe a sigh of relief with federal tax deadlines quickly approaching. However, those same companies are expected to keep an eye on the Texas Comptroller until May 15.e. Uncle Sam might not be the problem on this issue, but the Texas Comptroller could be!

[1] It should be noted that the Internal Revenue Service later issued Rev. Rul. 2021-2, which now makes Reverend Rul. 2020-27 obsolete.

[2] The Consolidated Appropriations Act, 2021, HR 133 (adopted December 27, 2020).

[3] Identifier. in section 278.

[4] Granted, there are notable exceptions and adjustments to the numbers reported on the federal income tax return (eg bad debt expense).

[5] Texas HB # 1195, Step 87, RS (2021); Texas SB 372, Stage 87, RS (2021).

[6] Identifier.

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