There is no uniformity among states regarding state conformity to the CARES Act, which was passed on March 27, 2020. Currently, Indiana does not conform. Indiana is a static conformity state, which means Indiana doesn’t automatically follow changes to the Internal Revenue Code (IRC). Indiana law must be passed in order to conform. There are 19 static conformity states and 21 rolling conformity states which conform automatically. Taxpayers with forgiven Payroll Protection Program (PPP) loans in rolling conformity states will most likely exclude the forgiven loan proceeds from taxable income at the federal and state level, but it is not a guarantee.
In addition, some states which are a static conformity state and have not passed legislation conforming to the CARES act, have passed legislation targeting the PPP loan forgiveness portion of the CARES Act. For example, Kentucky has not conformed to the CARES Act, however, they have issued specific guidance they will follow the federal law – excluding forgiven PPP loans from income and will follow IRS Notice 2020-32, which disallows deductions for expenses paid with forgiven loans.
There is also discussion regarding whether rolling conformity states will comply automatically with PPP loan forgiveness portion of the CARES Act or carve out an exception based on a narrow definition of gross income. Also, it is likely that additional states will adopt the CARES act retroactively when state legislators meet again in January.
Further complicating the picture, most states having a state income tax, begin with Federal Adjusted Gross Income (AGI) or taxable income as the starting point for calculating state taxable income. In order to tax PPP loan forgiveness at the state level, they will need to alter their forms on short notice if their state passes legislation complying retroactively.
Additional clarification of state positions will be monitored closely, but taxpayers should be aware of possible differences between Federal and state taxation.