Philly Won't Tax Fed. Virus Loans, Raises Interest Deduction

Philadelphia won't tax businesses on forgiven loans issued under a federal pandemic relief law and will conform to the federal government's higher business interest expense deduction, according to city Department of Revenue guidance.

The city will provide a gross income exclusion from the city's net profits tax and its business income and receipts tax for any forgiven amounts of Paycheck Protection Program loans granted under the Coronavirus Aid, Relief and Economic Security Act , the department said in a notice issued Monday. The city will also allow a deduction for expenses that were reimbursed by the forgiven loans, the department said.

Additionally, the city will conform to the CARES Act's increased business expense deduction limitation under Internal Revenue Code Section 163(j) of 50% of a taxpayer's adjusted taxable income, rather than 30%, and follow the federal law's special rules for partnerships, according to the notice. The notice also specifies that the city is decoupled from the federal law's 100% bonus depreciation deduction for certain qualified improvement property under IRC Section 168 .

For businesses that received the federal employee retention credit, Philadelphia will include qualified wages paid to employees as taxable compensation for city wage tax purposes. Employers that are subject to the city's business income and receipts tax should follow the federal treatment of qualified wages when determining their deductions, and the credit will not be treated as gross income to the employer, the notice said.

--Editing by Robert Rudinger.

For a reprint of this article, please contact reprints@law360.com.