Pennsylvania Excludes PPP Loan Forgiveness From Personal Income Tax

February 14, 2021

The Commonwealth of Pennsylvania has reversed its position on the treatment of income from forgiveness of Paycheck Protection Program (“PPP“) loans for personal income tax (“PIT”) purposes. Act 1 of 2021 (Senate Bill 109) (the “Act”) signed into law by Governor Wolf on February 5, 2021, provides in part that income from the forgiveness of a PPP loan will be excluded in the computation of an individual’s personal income taxes. These provisions would govern income received by individuals who are sole proprietors or receive pass-through income through partnerships or S-corporations.

The Act further confirmed that otherwise deductible business expenses funded from proceeds of a forgiven PPP loan will not be disallowed when computing PIT.

Previously the Department of Revenue (“DOR”) had taken the position that income from forgiveness of a PPP loan would be includable in the taxable income of an individual. The treatment of PPP loan forgiveness and expenses funded from forgiven PPP loans under Pennsylvania PIT rules now mirrors the treatment of these items under the federal income tax provisions.

For corporate net income tax purposes, the computation of taxable income begins with the federal taxable income figure. Since PPP loan forgiveness is excluded from income when determining federal income taxes, it is excluded in the Pennsylvania corporate net income tax computation. The DOR has confirmed there is no add back in this computation.

Houston Harbaugh attorneys are available to help with this and other business issues as you continue to proceed through the pandemic. Contact the attorney with whom you regularly deal or the below author of this article: Harrison Lauer