On March 15, 2021, Kentucky Governor Andy Beshear signed into law House Bill 278, which allows expenses paid with PPP loan proceeds to be tax deductible for Kentucky income tax purposes, providing much needed relief for taxpayers.

The passage of the Consolidated Appropriations Act (“CAA”) in late December provided taxpayers the ability to take tax deductions on their Federal income tax return for expenses paid with proceeds from PPP loans.  While this was Congress’ original intent under the CARES Act, the language was not included in the bill and thus required clarification from supplemental legislation. The CARES Act did state that PPP loans forgiven by the SBA would not be considered income.

IRC Conformity

States with “rolling” IRC conformity (states that automatically follow the current version of the IRC) by default considered these expenses paid with PPP loan proceeds to be tax deductible upon the passage of the CAA (unless they chose to separately decouple from the provision).

Kentucky has a “fixed date” IRC conformity and adopts the IRC in effect on December 31, 2018 for taxable years beginning on or after January 1, 2019.  This meant that for expenses paid with PPP loans to be tax deductible in Kentucky, the state legislature needed to pass legislation to allow it.  House Bill 278 provides the taxpayer relief needed to deduct the expenses for Kentucky income tax purposes.  The state had previously issued guidance indicating it would not consider forgiven PPP loan proceeds as taxable income.

Without passage of House Bill 278, small businesses in Kentucky would have been adversely impacted and could potentially have resulted in taxable income for state income tax purposes while at the same time having a loss for federal income tax purposes.

Proceed with Filing 2020 Returns in Kentucky

Many taxpayers were waiting to file their Kentucky business income tax filings waiting on this legislation.  Passage of House Bill 278 should now allow taxpayers to file comfortably knowing their expense paid with PPP loans are now tax deductible.

Additional Resources

As always, please contact us if you have any questions or would like to talk to one of our COVID-19 Advisory Team members – we’re here to help.

Barnes Dennig COVID-19 Advisory Team