Michigan Department of Treasury Confirms Conformity to Federal Treatment of PPP Loan Forgiveness
On April 19, 2021, the Michigan Department of Treasury issued a notice (the “Notice”) outlining Michigan’s conformity to the federal tax treatment of Paycheck Protection Program (“PPP”) loans under the Coronavirus Aid, Relief and Economic Security Act, Pub. L. No. 116-135 (the “CARES Act”). The Notice also provides guidance for both individual and corporate taxpayers relating to the calculation of sales apportionment, gross receipts for corporate taxpayers, and the calculation of Total Household Resources when taking into consideration the impact of PPP loan forgiveness.
Under the CARES Act, eligible taxpayers who received a PPP loan could apply for PPP loan forgiveness. The CARES Act provided that PPP loan forgiveness was excluded from gross income. However, those same taxpayers were not allowed a corresponding deduction of the business expenses paid for by the PPP loan. Congress addressed this issue in the Consolidated Appropriations Act, Pub. L. 116-260 (the “CAA”). The CAA gave taxpayers both the ability to exclude the forgiven PPP loan amount from their gross income as well as the ability to deduct business expenses paid for by the forgiven PPP loan.
For Michigan state tax purposes, Michigan’s Income Tax Act (the “Act”) imposes a tax on individuals and corporations, using their federal taxable income as a starting point. As contained in the Notice, and for purposes of Michigan state income tax, Michigan will conform to the federal tax treatment for both PPP loan forgiveness and the deductibility of business expenses. As such, taxpayers who have PPP loan forgiveness and business expense deductions for expenses paid for by the PPP loan at the federal level will enjoy the same benefit when calculating their Michigan income taxes.
Taxpayers who have business activity within and without the state of Michigan must apportion their income using a single sales factor apportionment formula, using a fraction to compare sales in Michigan, the numerator, to sales everywhere else, the denominator. For purposes of the tax imposed on individuals under the Act, the Notice provides that to the extent a taxpayer has PPP loan forgiveness, the amount of the PPP loan forgiveness must be included in the denominator for all taxpayers and in the numerator for those taxpayers who have their commercial domicile in Michigan. Corporate taxpayers are not required to include the PPP loan forgiveness in either the numerator or denominator of their single sales factor apportionment formula. However, the Notice does provide that for purposes of the Act, corporate taxpayers are required to include the amount of PPP loan forgiveness as gross receipts. Finally, the Notice provides that individuals eligible for certain credits must include the amount of PPP loan forgiveness in their Total Household Resources.
If you have any questions, please contact Michael Cumming ([email protected] or 248-203-0740), Scott Kocienski ([email protected] or 248-203-0868), Nardeen Dalli ([email protected] or 248-203-0793), or your local Dykema relationship attorney.
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