On March 15, 2021, Kentucky Governor Andy Beshear signed House Bill (HB) 278, which, effective immediately, allows the deduction of expenses paid with proceeds of forgiven Paycheck Protection Program (PPP) loans.

Kentucky's income tax law conforms to the Internal Revenue Code of 1986, as amended (IRC) as of a fixed date (which is currently the IRC as of December 31, 2018, for tax years beginning on or after January 1, 2019). Accordingly, Kentucky's tax law had conformed to the federal gross income exclusion for forgiven PPP loans. Kentucky tax law had not conformed, however, to recent federal amendments to the IRC enacted in 2020 by the Consolidated Appropriations Act, 2021 (P.L. 116-260) (CRA, 2021) (see notably Secs. 276 and 278 of the CRA, 2021, to which Kentucky's newly enacted law expressly refers), allowing deductions for expenses paid with proceeds of forgiven PPP loans.

HB 278 mirrors the federal income tax law by allowing expenses paid with forgiven PPP loan proceeds to be deducted from taxes imposed by Chapter 141 of the Kentucky Revised Statutes (e.g., income taxes). The provision applies to deductions attributed to the proceeds of forgiven PPP loans for tax years ending on or after March 27, 2020, but before January 1, 2022.

Implications

Kentucky forms and instructions have already been published and do not reflect the new deduction allowed by HB 278. The Kentucky Department of Revenue will need to modify its income tax instructions, software and forms to accommodate this change.

Taxpayers should consider these legislative changes in preparing 2020 Kentucky income tax returns. Taxpayers who have already filed income tax returns should consider whether amended returns must be filed to claim the additional deduction for expenses that were previously not allowed for Kentucky income tax purposes.

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