Governor Roy Cooper signed the state budget on November 18 that the North Carolina General Assembly passed this week. There are a variety of important tax changes in the budget, including one that affects all North Carolina businesses that received a Paycheck Protection Program (PPP) loan. Those borrowers will soon be able to deduct expenses that were covered by the loans from their state taxes, even if the loans were forgiven.

By allowing businesses to deduct those expenses, North Carolina now conforms to the federal approach and the approach of other states, including many in the Southeast. To help businesses during the pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act dictated that once a PPP loan was forgiven, no tax would be imposed on the borrower as a result of the forgiveness of indebtedness, in contrast to the general rule under the tax code. In addition, ordinary and necessary business expenses covered by a forgiven loan were deductible at the federal level.

But at the state level, North Carolina initially decoupled on the deductibility of expenses, which would have resulted in the state’s PPP borrowers taking a tax hit compared to borrowers in surrounding states. The newly minted North Carolina budget prevents that by conforming to the federal treatment for expenses covered by the PPP loan.

The budget also includes a number of other significant state tax changes that will be the subject of a forthcoming client alert.

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