North Carolina House Fast-Tracks PPP Deductibility
Updated April 30th, 2021
The North Carolina House of Representatives approved legislation that would align the state tax code with two recent federal tax changes.
The House was expected to adopt HB 334 on the third reading on Tuesday. As previously reported, the bill would allow businesses to deduct expenses associated with forgiven Paycheck Protection Program (PPP) loans received in 2020 and reinstate the expense add-back for PPP loan recipients effective January 1, 2021.
Instead, House members adopted an amendment to the bill that would do two things:
Expand deductibility for business expenses associated with forgiven PPP loans to include loans issued in 2020 and 2021.
Add a North Carolina taxpayer AGI deduction for the first $10,200 of unemployment compensation to conform to the federal tax exclusion contained in Section 9042 of the American Rescue Plan Act.
On Thursday, HB 334 passed the House on third and final reading by a vote of 112-1. The sole dissenting vote was Rep. Julia Howard (R-Davie), who was removed from her position as Senior Chair of the House Finance Committee earlier in the week after an intra-caucus dispute over the issue.
The changes approved by the House made HB 334 much more expensive. Although the official fiscal note has not yet been released, legislators say that the estimated revenue reduction will swell from $400 million to roughly $1.2 billion.
What Now?
On Wednesday, April 28th, the Senate Finance Committee approved its version of the annual IRC conformity bill (SB 322).
The 28-page bill updates from May 1, 2020, to April 1, 2021, the reference the Internal Revenue Code in North Carolina tax statutes. It decouples from several federal tax provisions, most notably the income exclusion for unemployment compensation found in the American Rescue Plan Act.
The bill also retains the add-back requirement for expenses associated with forgiven PPP loans and broadens this provision to include other similarly treated federal programs, such as emergency EIDL grants and targeted EIDL advances, loans under the Debt Relief Program, grants for Shuttered Venue Operators, and Restaurant Revitalization grants.
In short, the Senate appears to be taking a position in direct contrast to the position adopted by the House in HB 334. It appears highly unlikely at this point that the two chambers will agree on this issue.
Important Details:
Temporary alignment of NC law by repealing current NC law that does not allow businesses to deduct expenses funded with PPP funds if the proceeds are excluded from income for income tax purposes.
Only applicable to PPP round 1 for the tax year 2020
Not applicable to PPP round 2 in 2021 at this point
If your tax returns for 2020 have already been filed, the NC return will most likely add back the PPP expenses that were deducted on the US tax return. The NC return would need to be amended to get the refund. We do not believe the NC Department of Revenue will automatically refund this tax.
Example: A business receives $50,000 from PPP. Current NC law would require that the $50,000 be added back to NC income since it was deducted from US income. (Note that US income is the starting point for NC income). At a 5.25% tax rate, NC tax would be $2,625. The proposed income exclusion and the deduction would eliminate the tax.
Stay Tuned
Holden Moss CPAs is dedicated to aiding businesses in this difficult time. If you would like more information about your tax returns or any other aspects of new legislation, give us a call at (919) 556-6216. Contact us via email at admin@holdenmoss.com. We look forward to working with you.
*Updates and guidance are issued daily. The information above may change.