Governor McKee’s Supplemental Budget – PPP Loan Forgiveness Taxation

H.6121 is the Governor’s Supplemental Budget for the current fiscal year. Article 2 of the FY2021 Supplemental Budget includes a provision that decouples the Rhode Island income tax from the federal income as it relates to the treatment of PPP Loan Forgiveness. In December of 2020, the federal government reversed its treatment of PPP Loan Forgiveness so that it is considered nontaxable for federal tax purposes. Because Rhode Island is a “piggy-back” state, this tax treatment flows to the state tax treatment as well. It has been reported that Rhode Island would lose $133 million in tax revenue if the status quo remains. H.6121 proposes to decouple so that PPP Loan Forgiveness amounts over $150,000 would be taxable in the state of Rhode Island. Early reports indicate the State would recapture about half of the $133 million by making this change – that calculation could change as time moves forward. The language of the Article also appears to give the Tax Administrator specific authority to forgo taxing PPP Loan forgiveness over $150,000 if the State receives federal funds earmarked for state revenue replacement.