Is the forgiveness of federal Paycheck Protection Program (PPP) loan proceeds subject to Tennessee excise tax? Are expenses paid with PPP loan proceeds deductible for Tennessee excise tax purposes?

The starting point for calculating Tennessee excise tax is federal taxable income before the net operating loss deduction and special deductions, calculated in accordance with the Internal Revenue Code. Therefore, for excise tax purposes, the treatment of forgiven PPP loans and expenses paid with PPP loan proceeds will be consistent with how these items are treated for federal income tax purposes.

PPP Loan Forgiveness

The federal CARES Act provides that the amount of a PPP loan that is forgiven will be excluded from gross income for federal income tax purposes. Thus, such amount will also be excluded from gross income for Tennessee excise tax purposes.

Deducting Expenses Paid from PPP Loan Proceeds

PPP loan recipients are generally eligible for loan forgiveness in an amount equal to the sum of eligible expenses paid with the loan proceeds. Such expenses include payroll costs, interest on covered mortgage obligations, covered rent obligations, and covered utility payments (as defined in the CARES Act).

In accordance with the Consolidated Appropriations Act, 2021, to the extent the payment of eligible expenses results in PPP loan forgiveness, the expenses can be deducted for federal income tax purposes. Thus, the deduction of these expenses will be reflected for Tennessee excise tax purposes as well.

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