New Jersey exempts PPP loans from state taxes

(The Center Square) – New Jersey will exempt Paycheck Protection Program (PPP) loans from state taxes and allow recipients to deduct business expenses they paid using tax-exempt loans.

“This decision is designed to help already beleaguered small businesses, which are the majority of recipients of these loans,” Gov. Phil Murphy said in a news release. “It’s no secret that New Jersey has been one of the hardest hit states by COVID-19 and our small businesses have shouldered the brunt of it. PPP loans helped many stay afloat and this move will provide added benefit to help them weather this storm.”

Congress created the loans as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help small businesses keep employees on their payroll during the pandemic. The federal government may forgive some or all of the loans for recipients that meet certain conditions.

Last month, the state Senate advanced a bill on the topic. S-3234 would exempt PPP loans forgiven by the federal government from New Jersey’s Gross Income Tax (GIT).

State officials said they are taking action “under existing authority” and do not need legislation.

For 2020 taxes, “related expenses” paid using PPP loans will be deductible for GIT and Corporation Business Tax (CBT) purposes, officials said. Forgiven loans will not be subject to either tax.

New Jersey businesses have received 155,851 PPP loans totaling $17.3 billion. Of those, 133,961 totaling $4.6 billion were for less than $150,000, while 19,066 totaling $6.6 billion were approved for between $150,000 and $1 million.

“PPP loans have played a critical role in helping Main Street stay afloat and keeping residents employed,” State Treasurer Elizabeth Maher Muoio said in a news release. “Given that the vast majority of these loan recipients are smaller businesses, the decision to make these loans tax exempt and the proceeds tax deductible was a logical one as we continue to grapple with COVID’s prolonged impact.”

While federal law “generally considers forgiven loans to be taxable income,” according to the Office of Legislative Services, the CARES Act exempted forgiven PPP loans from federal income taxes. Additionally, according to a bill statement, the IRS issued a notice “denying tax deductions for expenses paid” with a forgiven PPP loan.

“As we continue to battle the economic and public health crises caused by COVID-19, it is critically important that we ensure forgiven Paycheck Protection Program (PPP) loans will not be subject to the State taxation,” Assembly Majority Leader Louis Greenwald, D-Camden/Burlington, said in a news release. “… We must do all we can to help those businesses struggling as a result of the pandemic and position them to recover when the public health crisis subsides.”

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