No good deed….

If you received a Paycheck Protection Program (PPP Loan) Loan[1] and the SBA forgave the loan[2], you undoubtedly breathed a sigh of relief. Not only would you not have to pay back the PPP Loan, the forgiven principal is not income.[3] Moreover, any rent, wages, etc. paid from the PPP Loan proceeds is deductible for federal income tax purposes.[4] Thus, a good deed was bestowed and not punished.[5]

Or was it? HB 2253, sponsored by Oregon Representative Wilde, seeks to recover tax income revenue otherwise escaped by a forgiven PPP Loan. If HB 2253 becomes law, Oregon will impose a 10% “surcharge” on the amount of a forgiven PPP Loan if the PPP Loan recipient (Recipient) did not need the loan in the first place. HB 2253 sets an arbitrary standard for determining whether the loan was needed: if 2020 receipts exceed 2019 receipts by more than 5%, the surcharge applies.

For example, assume a Recipient’s 2019 receipts were $100,000 and their 2020 receipts were $106,000. The surcharge ($10,000) is imposed on the $100,000 PPP Loan because 2020 receipts increased by 6% over 2019 receipts. The bill does not say when the surcharge must be paid.

A few important issues with HB 2253 are:

  1. The surcharge is imposed on the Recipient. Thus, the purchaser of the stock or LLC units of a Recipient would presumably incur the surcharge.[6] If an individual or entity sold the assets of the Recipient, presumably the selling Recipient would pay the surcharge. Business sales involving a Recipient should be examined carefully if HB 2253 becomes law.
  2. Because HB 2253 imposes the surcharge based upon “receipts,” a Recipient may have had increased receipts from 2019 to 2020 but reduced or no net income. Thus, having the cash to pay the surcharge is not relevant under HB 2253.
  3. If a Recipient’s receipts (i) decreased or (ii) increased by less than 5%, the surcharge does not apply.
  4. If Oregon ultimately denies deductibility of expenses paid with PPP loan proceeds and HB 2253 becomes law, the potential for double taxation may apply.

If HB 2253 seems destined to become law, or is modified in the legislative process, we will keep you informed.

You can read the actual bill and check its progress here.

[1] Under section 1102 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

[2] Under section 1106(b) of the CARES Act.

[3] As a general rule, income from discharge of indebtedness is gross income.

[4] Oregon has not yet issued specific guidance on whether the expenses paid with PPP loan proceeds are deductible for Oregon income tax purposes.

[5] That said, the Oregon Department of Revenue has determined that certain federal assistance to businesses in the form of a PPP loan is not commercial activity under the Oregon statute and will not be subject to the Corporate Activity Tax.

[6] HB 2253 does not discuss how the surcharge applies in the context of a business sale.