Texas Business Owners: PPP Forgiven Loans Are Nontaxable

Please note: This blog is current to the date of its publication, Tuesday, May 11. For additional updates or assistance navigating these uncertain times, please contact us or visit our SST COVID-19 resource page.

As of Saturday May 8, 2021, Texas business owners who received a Paycheck Protection Program (PPP) loan that was later forgiven do not have to include that income in their franchise tax report.

Previously, since Texas is a “static” state in that we do not automatically change our tax code based on changes to the Internal Revenue Code, unless a certain source of income is specifically excepted from being recognized as income per the 2007 Texas Statute, then the income must be included in total revenue.

Therefore, any PPP loans that Texas business owners had received which had been forgiven and exempted from taxation under federal law, were to be INCLUDED in Texas total revenue.

Enter Texas HB 1195, which was signed into law on Saturday, May 8, by Governor Abbott, having passed both the Senate and the House in quick order. HB 1195, relating to the franchise tax treatment of certain loans and grants made under the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act, provides that the funds forgiven and exempted from taxation for federal purposes shall also be exempted from revenue and taxation for Texas franchise purposes.

This will come as a huge relief to the many Texans who desperately needed those funds to support their businesses but cannot afford to pay the additional franchise tax that would have been assessed on these funds.

If you have already filed your franchise report and included the forgiven PPP loans in revenue, you will need to file an amended report to remove these amounts from income. The experts at SST are happy to assist you in the filing of this amended report and reclaim the tax dollars that your business needs to sustain itself. Contact us today for guidance.

Finally, qualifying expenses related to the PPP loan can be deducted as Cost of Goods Sold or compensation, whichever category applies in your situation.

Special thanks to SST’s Senior Tax Manager Rachel Alexander for providing the content for this post.