If a Hawaii Sole Proprietor recognizes a PPP loan as state income, how is this offset with expense since the Proprietor has no personal salary deduction on schedule C?

[rmriss]

The loan has been forgiven.  The PPP monies were not used to pay rent, utiliities or other employee wages as they would be for a business with employees.

[Carl]

The loan is recorded as business income in the tax year it was forgiven. Then allowed business expenses will offset the taxability of it, just like those expenses would offset the taxability of business income from any other source.

[rmriss]

Your suggested approach would be fine if I were filing as an S Corp rather than as a Sole Proprietor.  As an S Corp I could both recognize the Income and then deduct the equivalent amount of expense as Wages.  However, as a Sole Proprietor I'm not allowed to pay Salary/Wages to myself nor deduct them.   Under PPP rules, the money can be used to pay for Wages,  Home Office Mortgage Interest, Home Office Utilities.  The amount of money the business paid for Mortgage Interest and Utilities is minimal and totally insufficient to offset the PPP loan I received.  As a result, I'm faced with having to recognize the PPP Loan amount primarily as extra income with effectively a minor expense offset.  I could theoretically recognize only the amount of the loan used to pay these minor expenses and not report the balance received, but I question whether the state will accept this.

[Carl]

Your suggested approach would be fine if I were filing as an S Corp rather than as a Sole Proprietor.

Or, if your sole proprietorship had other W-2 employees. Since the PPP money was specifically designated for paying employees, I'm a bit perplexed about it being forgiven. To the best of my knowledge, the loan is only forgiven if used to pay employee wages with. But that aside:

Borrowed money where payback of the loan is forgiven is "usually" reported to the borrower on IRS Form 1099-C - Cancellation of Debt form.  Then the forgiven amount becomes taxable (or at least reportable) income to the person or entity that payback of the borrowed money is no longer required from.

As for the PPP, while I did see and am well aware of the "forgiveness of debt" rules, I have never seen nor even heard rumor about any "forgiveness of taxes" on that PPP money that does not have to be paid back. This is true to the best of my knowledge not just at the federal level, but at the state level too for all states that tax personal income.

So if this is a state tax issue for you on state taxes, you might want to actually call the HI dept of Taxation at 1-800-222-3229 to get clarification. If you're on maui it's 808-984-8500. For molokai it's 808-553-5541. Kauai is 808-274-3456 and the big island is 808-974-6321.

But again, as I've not seen anything, anywhere that states the forgiven PPP debt is tax free at the federal or state level, I fully expect the forgiven amount to be reportable and taxable by both, with taxability offset only by those business expenses that are deductible from the business income.

[Rick19744]

A few questions:

• What did you use to determine your PPP amount when you applied?
• What was the amount received?
• Have you applied for forgiveness?
• What was the PPP money used for?

[Carl]

Thanks for the help Rick. From what I understand based on the information earlier in this thread, the money was used for business expenses, and not for paying any employees since they don't have any W-2 employees. (SCH C sole proprietorship business type.)

[Brian CPA]

"the CARES Act provides that forgiven PPP loan proceeds are not included in
gross income for federal income tax purposes. Hawaii has also adopted this special treatment
through enactment of Act 13, Session Laws of Hawaii 2020."

https://files.hawaii.gov/tax/legal/tir/tir20-06_rev.pdf