July 7, 2020
Ohio legislature enacts Commercial Activity Tax exclusion for forgiven Paycheck Protection Program loans
Under a newly-enacted Ohio law (Ohio amended Substitute House Bill 481 (HB 481)), the forgiven amount of a Paycheck Protection Program (PPP) loan excluded from gross income for federal income tax purposes under Section 1106(i) of the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-36) (CARES Act) is not subject to the Ohio Commercial Activity Tax (CAT).
The PPP, a business loan program established by the CARES Act and administered by the U.S. Small Business Administration, allows small businesses to receive low-interest loans. Under Section 1106 of the CARES Act, a PPP loan may be forgiven to the extent its proceeds are used to pay certain payroll and other eligible costs and the borrower satisfies other conditions. Any forgiven amounts that would otherwise be treated as cancellation of indebtedness income may be excluded from gross income for federal income tax purposes.
The CAT applies to Ohio-sourced gross receipts. Gross receipts for CAT purposes are defined very broadly with few exemptions. Ohio Rev. Code Section 5751.01(F)(2)(e) excludes from gross receipts the principal amount received by a person on account of any transaction characterized as a loan, but no general exclusion from gross receipts exists for forgiven debt. Section 36 of HB 4811 addresses this omission by expressly excluding from gross receipts the amount of forgiven indebtedness that is excluded from a taxpayer's gross income for federal income tax purposes under Section 1106(i) of the CARES Act. This provision is not directed to be codified in the Ohio Rev. Code, so it remains to be seen how it will be referenced in the Ohio statutes.
Any Ohio CAT taxpayer that qualifies for forgiveness of a PPP loan should be aware of this newly enacted CAT exclusion.
1 HB 431, Sec. 36 ("Notwithstanding any provision of Chapter 5751. of the [Ohio] Revised Code [Ohio Commercial Activity Tax law] to the contrary, 'gross receipts,' as defined in section 5751.01 of the [Ohio] Revised Code, excludes receipts from any forgiven indebtedness that is excluded from the gross income of the taxpayer for federal income tax purposes pursuant to section 1106(i) of the 'Coronavirus Aid, Relief, and Economic Security (CARES) Act,' 15 U.S.C. 9005(i).")