The Paycheck Protection Program (PPP) loan was originally enacted under the Coronavirus Aid Relief and Economic Security (CARES) Act to help small businesses impacted by the COVID-19 pandemic. Those eligible borrowers were able to use the funds for payroll and other qualified expenses. Borrowers were able to apply for partial or full forgiveness. Under the Consolidated Appropriations Act (CAA) enacted on December 27, 2020, Congress determined that the amount forgiven is excluded from gross income and all expenses paid by the loan were fully deductible on the federal return.
Michigan corporate and individual taxpayers need to take various items into consideration in determining the impact of the PPP loan under the Michigan Income Tax Act. Items to consider are sales apportionment for both individual and corporate taxpayers, gross receipts under the corporate income tax (CIT) and computation of total household resources.
Individuals and corporate taxpayers apportion income using a single sales factor. The sales factor is determined by taking Michigan sales divided by total sales everywhere. Under the Individual Income Tax Act, sales is defined to mean “all gross receipts of the taxpayer”. To the extent the PPP loan is forgiven, the amount is included in the sales factor calculation. The amount forgiven would be included in the denominator for all taxpayers and would only be included in the numerator if the taxpayer is domiciled in Michigan. Under the CIT, sales are defined as “the transfer of property that can be characterized as stock in trade, for the performance of certain services, or for the rental, lease, licensing, and use of tangible and intangible property.” Corporations are therefore not required to include the forgiven part of the PPP loan in the apportionment factor.
Taxpayers with allocated gross receipts less than $350,000 are not required to file an annual CIT return. According to Michigan Comp. Laws Ann. Section 206.671, the term gross receipts is “the entire amount received by the taxpayer from any activity whether in intrastate, interstate, or foreign commerce carried on for direct or indirect gain, benefit, or advantage to the taxpayer or to others”. The PPP loan is only included in gross receipts only to the extent the loan is forgiven.
Total household resources are measured to determine whether an individual is eligible for various income tax credits under the Individual Income Tax Act. Income is defined to include “federal adjusted gross income plus all income specifically excluded or exempt from the computation of federal adjusted gross income”. Since total household income is based on federal adjusted gross income, its calculation will include the PPP expenses that are deductible at the federal level but will include in adjusted gross income, the amount of loan that is forgiven.