What’s The Impact On CAT & Income Taxes?
There was much activity in the tax realm over the course of 2020 as federal, state, and local governments responded to the impact of COVID-19 by legislation to stimulate the economy. From a federal standpoint, the tax situation appears to be settled with the Consolidated Appropriations Act, which was signed on Dec. 27, 2020, but the situation is still primarily in flux at the state level.
This article will provide you with a summary of the situation as it currently stands in order to help you comply with returns you may be preparing internally, as well as inform you of what Rea & Associates will be considering when working on accounts over the next year.
Commercial Activity Tax
Ohio Bureau of Worker’s Compensation Refunds
The Ohio Department of Taxation currently views all rounds of refunds as taxable gross receipts for Commercial Activity Tax purposes. While there is disagreement among state and local tax professionals as to whether or not the existing rules provide taxpayers the ability to exclude the refunds, a legislative fix is being pursued to make this treatment more explicit. Taxpayers and their preparers should carefully weigh their current financial outlook when deciding how to approach this issue.
Paycheck Protection Program Loan Forgiveness
Legislation has been passed to exclude proceeds from Paycheck Protection Plan (PPP) loan forgiveness from the Commercial Activity Tax calculation. Do not include these proceeds in your calculation. If you have previously included them in past filings, it is recommended that you amend the appropriate filing and file a refund claim.
EIDL Grants, Provider Relief Fund, Ohio Small Business Relief Grant, Bar & Restaurant Assistance Fund, and County/Local Grant Programs
Proceeds received from EIDL Grants, the Provider Relief Fund, the Ohio Small Business Relief Grant, the Bar & Restaurant Assistance Fund, and the County/Local Grant Programs programs are to be included in your Commercial Activity Tax calculations as no exclusion is currently available, nor is there currently discussion regarding the exclusion of these receipts. However, EIDL loans that are to be paid back are not to be included in CAT receipts.
While the deductibility of expenses related to the loan forgiveness proceeds is now deductible for Federal tax purposes, thanks to the passage of the Consolidated Appropriations Act, all states will not automatically conform to this benefit.
Income Tax
State Paycheck Protection Loan Forgiveness
While the deductibility of expenses related to the loan forgiveness proceeds is now deductible for Federal tax purposes, thanks to the passage of the Consolidated Appropriations Act, all states will not automatically conform to this benefit. Depending on the state (and sometimes even the tax type within the state), they may automatically conform or need to pass legislation to conform to the Internal Revenue Code as of a specific date. Furthermore, if they do automatically conform to the Internal Revenue Code as of a specific date, they may decide to require an add-back to certain provisions (in this case, the deductibility of the PPP expenses).
Considering the Consolidated Appropriations Act to allow the deductibility of PPP-related expenses was passed at the very end of 2020, states are in a scramble to analyze the effect on their budget and respond as needed in terms of allowing or disallowing the deduction. We will learn a lot in the coming months and prepare your returns based on current law at the time of filing. If there are changes after the fact that will change your tax situation, we will inform you.
Local Paycheck Protection Loan Forgiveness
Ohio Municipal Income Tax statute currently follows the context of the laws of the United States relating to federal income taxation, unless otherwise defined within Ohio Revised Code (ORC) 718. As a result, PPP expenses are currently deductible for municipal taxation and any change would not be foreseen. The Regional Income Tax Agency (RITA), a municipal tax administrator that acts on behalf of more than 300 municipalities in the State of Ohio, has already explicitly confirmed the allowance of the deduction of the PPP expenses in a recent webinar.
While this is a lot to take in, our hope is that you now have some clarity with regard to how the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and Consolidated Appropriations Act will impact your tax prep strategy. In the meantime, we know that changes will continue to occur, distribution of guidance will be ongoing, and new questions and concerns will have to be considered. Rea’s federal and state and local tax teams will continue to keep you informed every step of the way. However, if you do have questions or concerns that require immediate attention, please make an appointment with your Rea advisor or contact us today.
By Lamarcus Crowders (Dublin CPA Firm)
Looking for additional resources to help you make sense of the CARES Act and the Consolidated Appropriations Act? Check out these resources:
[ON-DEMAND WEBINAR] What Does The New Stimulus Bill Mean For Businesses?
[ARTICLE] Understanding The Tax Provisions Outlined In The New Stimulus Package