Guidance: Texas Franchise Tax & PPP Loan Forgiveness
Certain COVID-Related Federal Loan and Grant Programs Relief
Source: Texas Comptroller
In 2020 and 2021, Congress passed several COVID-related relief packages, including the CARES Act, the Paycheck Protection Program and the American Rescue Plan. These programs have provided much-needed money to businesses via loans and grants. The federal government will forgive the loans (thus not requiring repayment), and will not consider the grants taxable income, if a business meets certain requirements.
Generally, forgiven loan proceeds and grants must be reported as income for federal tax purposes. Based on the application of the Internal Revenue Code to the Texas franchise tax, the federal determination that the forgiven loan proceeds and grants are not includable as income did not affect the way Texas franchise tax is calculated. Under the law prior to May 8, 2021, forgiven loan proceeds and grants were generally included in an entity’s total revenue. This inclusion could increase the amount of franchise tax an entity owed. The law was clear and the only way to separate the forgiven loan proceeds and grants from total revenue was legislative action.
HB 1195 was passed through both houses of the legislature and had immediate effect when it was signed by the Governor on May 8, 2021. This bill added section 171.10131 to the Texas Tax Code. For franchise tax reports originally due on or after Jan. 1, 2021, forgiven loan proceeds and grants from qualifying COVID-related federal programs are not included in total revenue and should not be reported on the franchise tax report as revenue. Further, expenses paid using those loan proceeds and grants may be claimed as a cost-of-goods sold or as compensation, if eligible under Tax Code Sections 171.1012 and 171.1013, in the franchise tax calculation.
Qualifying COVID-related federal loan and grant programs include the following:
- Coronavirus Aid, Relief, and Economic Security (CARES) Act
- Paycheck Protection Program (PPP) Flexibility Act of 2020
- PPP Extension Act of 2021
- American Rescue Plan Act of 2021
- Consolidated Appropriations Act, 2021