(TRENTON) – In an effort to aid small businesses impacted by the COVID-19 pandemic, Governor Phil Murphy and State Treasurer Elizabeth Maher Muoio announced yesterday that New Jersey will follow the federal government’s lead in allowing Paycheck Protection Program (PPP) loans to be tax exempt at the state level and enable recipients to deduct business expenses that were paid with the tax-exempt loan proceeds, thereby enhancing the tax benefits of the loans.

“This decision is designed to help already beleaguered small businesses, which are the majority of recipients of these loans,” said Governor Murphy. “It’s no secret that New Jersey has been one of the hardest hit states by COVID-19 and our small businesses have shouldered the brunt of it. PPP loans helped many stay afloat and this move will provide added benefit to help them weather this storm.”

Of the 155,851 loans totaling $17.3 billion that New Jersey businesses received, the vast majority were for smaller businesses:

“PPP loans have played a critical role in helping Main Street stay afloat and keeping residents employed,” said State Treasurer Elizabeth Maher Muoio. “Given that the vast majority of these loan recipients are smaller businesses, the decision to make these loans tax exempt and the proceeds tax deductible was a logical one as we continue to grapple with COVID’s prolonged impact.”

Under the federal PPP, some or all of the loan may be forgiven if certain conditions are met. While federal law generally considers forgiven loans to be taxable income, the “Consolidated Appropriations Act, 2021,” which reauthorized the program, clarified that the amount of a PPP loan which is forgiven may be excluded from income for federal tax purposes and that expenses covered by PPP loans may be deducted from income for federal tax purposes.

New Jersey can follow the federal government’s treatment without enabling legislation under existing authority. As a result, for the 2020 tax season, related expenses paid for with PPP loans will be deductible for both Gross Income Tax (GIT) and Corporation Business Tax (CBT) purposes and forgiven loans will be excluded from being subject to either tax.

“This will help ensure that the receipt and forgiveness of coronavirus assistance through the PPP does not result in surprise tax bills that small businesses can’t afford,” said Senator Paul Sarlo, chairman of the Senate Budget and Appropriations Committee.

We will continue to keep you updated. Please visit our COVID-19 Resource Page for more alerts. Learn about our COVID-19 Recovery Services.

Feel free to contact any member of our team at (610) 828-1900 (PA) or (732) 341-3893 (NJ) with questions. Rich Higgins, CPA, managing principal – New Jersey office can be contacted at Richard.Higgins@McCarthy.CPA. I can be reached at Marty.McCarthy@McCarthy.CPA As always, we are happy to help.