May 10, 2021
Texas exempts forgiven PPP loans, other federal COVID-19 related grants and loans from franchise tax
On May 8, 2021, Governor Greg Abbott signed HB 1195, which exempts forgiven Paycheck Protection Program (PPP) loans from being included in total revenue for purposes of the Texas franchise tax. Other federal COVID-19-related loans and grants excluded from taxable total revenue include emergency economic injury disaster loans (EIDL) and targeted EIDL advances, small business loan payments, grants for shuttered venue operators, microloan program recovery assistance and restaurant revitalization grants.1 These amounts are excluded only if the loan or grant is excluded from federal taxable income.
Business expenses paid with such loan or grant proceeds can be deducted as cost of goods sold (COGS) or compensation in determining taxable margin, to the extent the expense is otherwise includable as a COGS or compensation.
These changes took immediate effect and apply only to franchise tax reports originally due on or after January 1, 2021.
Before this law change, the Texas Comptroller of Public Accounts (Comptroller) had determined that due to the its January 1, 2007 date of conformity to the Internal Revenue Code, Texas's franchise tax law did not conform to the federal income tax exclusion for forgiven PPP loan amounts.2 This law change overrides the Comptroller's earlier determination. Thus, affected taxpayers should exclude these forgiven loan amounts and grants from total revenue in computing their Texas franchise tax reports. Taxpayers that have already filed such reports may want to consider filing an amended report to reflect this income exclusion.
1 Available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) of 2020 (P.L. 116-136), the Paycheck Protection Program Flexibility Act of 2020 (P.L. 116-142), the Consolidated Appropriations Act, 2021 (P.L. 116-260), the American Rescue Plan Act of 2021 (P.L. 117-2) and the PPP Extension Act of 2021 (P.L. 117-6).
2 Tex. Comp. of Pub. Accts., Tax Policy News - Paycheck Protection Program Loans Forgiveness and Franchise Tax (Feb. 2021).