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Davis Brown Tax Law Blog

State Tax Treatment of Funds Received Through COVID-19 Relief Efforts - June 19, 2020

Over the last several months, businesses and individuals have received funds through various COVID-19 relief efforts. They now may be wondering what, if any, impact these funds will have on their tax returns next year. The recently passed House File 2641 provides some answers.

Paycheck Protection Program Loan Forgiveness

Taxpayers are often required to include funds from forgiven loans as part of their net income when filing their tax return. The CARES Act indicated that, for federal tax purposes, any funds forgiven as part of the Paycheck Protection Program would not be included when calculating gross income for the loan recipient. House File 2641 similarly excludes these forgiven loan funds when calculating net income for Iowa state tax purposes for any tax year beginning on or after January 1, 2019, and ending after March 27, 2020.

It is important to note that Paycheck Protection Program loan forgiveness is not completely free from tax consequences. The IRS has issued guidance indicating that the normal tax deduction for ordinary and necessary business expenses will not be allowed for any business expenses covered by forgiven Paycheck Protection Program funds. My colleague, Courtney Strutt Todd, reviewed this impact in a previous post about the PPP Flexibility Act

Iowa Small Business Relief Grants

When calculating net income, businesses may also subtract the amount of any COVID-19 relief funds received through the Iowa small business relief grant program. 

Stimulus Checks

Iowa’s personal tax returns include a deduction for federal income taxes, which is calculated by adding the amount of federal income taxes paid or accrued during the tax year and subtracting federal income tax refunds received during the tax year. When calculating this deduction for the 2020 tax year, taxpayers do not need to make adjustments for stimulus checks received as part of the income tax rebate provided under the CARES Act.

Emergency Student Grant Money

The CARES Act allowed colleges and universities options to award emergency relief to students experiencing financial need as a result of COVID-19. Students who received these funds from their educational institutions are not required to include these funds in their net income for Iowa tax returns for tax years ending after March 27, 2020.

Big Picture

When filing your taxes next year, it will be important to discuss any COVID-19 related relief funds that you have received with your tax professional to ensure that you exclude relief income when appropriate.

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