One of the many new terms introduced in 2020 was the Paycheck Protection Program (PPP). Established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( Pub. L. 116136 ) and administered by the Small Business Administration (SBA), with the support of the United States Treasury, the PPP provides small businesses funds to pay up to eight weeks of payroll costs, including benefits, and allows for funds to be used to pay interest on mortgages, rent and utilities. On , legislation was enacted to expand the PPP to include a second draw loan for certain taxpayers and to expand the scope of eligibility for PPP funds.
One of the interesting and controversial aspects of the PPP is the loan forgiveness element. Rul. 2021-2, after the legislature in the Consolidated Appropriations Act, 2021 (Pub. L. No. 116-260) (CCA) specified that the forgiven loans would not be includible in income and ordinary, reasonable and necessary business expenses associated therewith would not be disallowed. For Texans, this might create Texas franchise tax issues.
The Texas franchise tax, based on a margin calculation, was originally made effective for 2008 franchise tax reports based on business conducted in 2007 and reported on the subject businesses 2007 federal income tax returns, as set forth in Texas Tax Code § . The margin calculation is based on a formula that subtracts cost of goods sold (COGS), compensation or a standard/minimum deduction from the entitys revenues. The margin is then apportioned based on a gross receipts formula, comparing gross receipts from business done in Texas to gross receipts from its entire business.
The franchise tax statute incorporates the Internal Revenue Code (IRC) as of without adjustments made after that date, so taxpayers may still need to make adjustments to their federal tax amounts in reporting Texas franchise tax.
Originally, the IRS declared that business expenses incurred and paid for using forgiven PPP loans would be nondeductible, but revised its position in Rev
Both the CARES Act and the CAA state that the forgiveness of the PPP debt is not taxable income for federal tax purposes. However, both laws were enacted after . Forgiveness of debt was generally taxable under the Internal Revenue Code effective , as cancellation of indebtedness income. Therefore, unless an exception applied as of that date, forgiven PPP loans are likely to be includible in calculating both Texas franchise tax revenues and gross receipts.
For PPP loan purposes, forgiven loans would need to be added back to the items reported on the federal income tax return in calculating Texas franchise tax revenues, unless the taxpayer identifies an exception from the inclusion that would have applied under the IRC in effect on
As a general rule, when a debt is forgiven or cancelled, a debtors gross income includes an amount equal to the difference between what was due on the obligation and the amount the debtor has paid to date. The taxpayer realizes and recognizes a benefit equal to the value of the reduction of the liability. Since the debt was not included in income previously, a reduction of the debt becomes income when its forgiven because its a decrease in an existing obligation.
The margin computation begins with a taxable entitys revenues. The franchise tax computation of revenue, which is Wisconsin pawn shops used in calculating taxable ounts reported on specific lines of the applicable federal income tax forms for the various types of reporting entities.
Referencing specific lines on federal income tax forms allows Texas to incorporate, by reference, the entire body of federal tax law that determines the amounts reportable on the forms.