Are forgivable Paycheck Protection Program (PPP) loan proceeds counted as gross receipts for Virginia's local BPOL tax?

Subject

Exemption : Loan Proceeds - Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), Paycheck Protection Program

Plain-English summary

A locality, referred to as the "City," asked the Department of Taxation for an advisory opinion on whether forgivable Paycheck Protection Program (PPP) loans should be excluded from a business's gross receipts when computing the local Business, Professional and Occupational License (BPOL) tax. The PPP was created by the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), P.L. 116-136, and is administered by the federal Small Business Administration; borrowers can qualify to have all or part of the loan forgiven if they use the money for things like eligible payroll costs, mortgage interest, rent, or utilities during the covered period.

The Tax Commissioner advised that PPP loan proceeds are not gross receipts for BPOL tax purposes. Although the CARES Act separately excludes forgiven PPP loans from gross income for federal income tax purposes, the Commissioner explained that this federal income-tax treatment does not control the BPOL analysis, because BPOL is a distinct, gross-receipts-based tax with its own statutory and regulatory definitions. Looking at those definitions, the Commissioner found the loan proceeds are not received through "the exercise of the licensed privilege . . . in the ordinary course of business" -- the loans exist to help businesses retain employees during the pandemic, not to compensate the business for selling goods or providing services. Even setting that reasoning aside, the Commissioner pointed to Va. Code § 58.1-3732 A 4, which excludes from gross receipts any proceeds of a loan transaction where the licensee is the borrower; the fact that a PPP loan may later be forgiven does not change its character as loan proceeds. The bottom line: PPP loan proceeds are excluded from BPOL gross receipts whether or not the loan is ultimately forgiven.

What this means for you

Businesses computing BPOL gross receipts

If your business received a PPP loan, you do not need to include the loan proceeds in gross receipts when calculating your local BPOL tax liability -- this holds true whether the loan is later forgiven in full, forgiven in part, or not forgiven at all. The Commissioner's reasoning rests on two independent grounds: PPP proceeds are not earned through the ordinary-course exercise of your licensed business privilege, and separately, they qualify as excluded loan proceeds under Va. Code § 58.1-3732 A 4 because your business is the borrower.

Localities administering the BPOL tax

BPOL is a local tax administered by local officials, not the Department, but Va. Code § 58.1-3701 authorizes the Department to issue advisory opinions on local license tax questions like this one at a locality's request. This opinion gives localities a basis for excluding PPP loan proceeds from a licensee's gross receipts calculations, consistent with how the Department reads the existing statutory loan-proceeds exclusion.

Distinguishing BPOL treatment from federal income tax treatment

This ruling is a useful reminder that federal tax treatment of an item (here, the CARES Act's federal income-tax exclusion for forgiven PPP loans under IRC § 61(a)(11) and CARES Act § 1106(i)) does not automatically carry over to Virginia's local gross-receipts-based BPOL tax. The Commissioner independently analyzed the BPOL statute and regulatory definition of gross receipts rather than simply deferring to the federal exclusion.

Common questions

Q: Do businesses have to include PPP loan proceeds in their BPOL gross receipts?
A: No. The Tax Commissioner advised that PPP loan proceeds are not gross receipts for BPOL tax purposes, regardless of whether some or all of the loan is later forgiven.

Q: Does it matter that the CARES Act excludes forgiven PPP loans from federal gross income?
A: Not directly. The Commissioner noted that BPOL is a separate and distinct tax from income tax, so the federal income tax treatment of forgiven PPP loans is not determinative of whether the proceeds are taxable BPOL gross receipts; that question has to be answered under the BPOL statutes and regulations themselves.

Q: What is the legal basis for excluding the loan proceeds even before considering forgiveness?
A: Va. Code § 58.1-3732 A 4 excludes from gross receipts any proceeds of a loan transaction in which the licensee is the obligor (borrower). The Commissioner found that a PPP loan's potential forgiveness does not change the fact that, when received, the funds are loan proceeds.

Q: Why doesn't receiving a PPP loan count as "exercising the licensed privilege" to do business?
A: The Commissioner reasoned that the primary purpose of PPP loans is to help businesses keep employees on payroll during the pandemic-driven economic hardship, not to compensate the business for selling goods or providing services in the ordinary course of its licensed business activity.

Q: Who asked for this opinion, and is it binding on other localities?
A: A locality (identified only as the "City") requested the advisory opinion under Va. Code § 58.1-3701, which authorizes the Department to issue guidance on local BPOL tax issues. Like other Department rulings, it is based on the facts presented and is not a guarantee of the same outcome for every taxpayer or locality, but it reflects the Department's interpretation of the applicable BPOL statutes.

Citations and references

Statutes:

• Va. Code § 58.1-3700.1 (definition of gross receipts for BPOL tax)
• Va. Code § 58.1-3701 (Department authority to issue BPOL advisory opinions)
• Va. Code § 58.1-3732 A 4 (exclusion from gross receipts for loan proceeds where licensee is obligor)
• IRC § 61(a)(11) (discharge of indebtedness as gross income)
• CARES Act, P.L. 116-136, § 1106(i) (exclusion from gross income for forgiven PPP loans)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-12

Original ruling text

February 9, 2021

Re: Request for Advisory Opinion

Business, Professional and Occupational License Tax

Dear *:

This is in response to your letter in which you request an advisory opinion on behalf of the * (the “City”) concerning whether forgivable loans paid out to businesses under the Paycheck Protection Program should be excluded from gross receipts for purposes of computing the Business, Professional and Occupational License (BPOL) tax.

The local license fee and tax are imposed and administered by local officials. Virginia Code § 58.1-3701 authorizes the Department to promulgate guidelines and issue advisory opinions on local license tax issues. The following opinion has been made subject to the fact presented to the Department summarized below. Any change in these facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections and regulation cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site.

FACTS

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), P.L. 116-136 (3/27/2020) established a loan program commonly known as the Paycheck Protection Program (PPP) which is administered by the federal Small Business Administration (SBA). Under certain circumstances, borrowers may qualify for loan forgiveness under the CARES Act. The City asks whether such forgivable loans should be included in a taxpayer’s gross receipts for purposes of the BPOL tax.

OPINION

Normally, loan proceeds are not considered to be income for federal income tax purposes because they have to be paid back. Under Internal Revenue Code (IRC) § 61(a)(11), income from the discharge of indebtedness is considered gross income for federal income tax purposes. Section 1106(i) of the CARES Act created an exclusion from gross income for loans forgiven under the PPP, reversing the general rule as to the taxability of income from the discharge of indebtedness. Because the BPOL tax is a separate and distinct tax from income tax, however, the taxability of PPP loan proceeds for federal income tax purposes is not determinative of whether the proceeds should be considered taxable gross receipts. That question must be answered with reference to the applicable BPOL statutes and regulations.

For purposes of the BPOL tax, gross receipts means “the whole, entire, total receipts, without deduction.” See Virginia Code § 58.1-3700.1. The BPOL regulations further define gross receipts as:

[t]he whole, entire, total receipts, of money or other consideration received by the taxpayer as a result of transactions with others besides himself and that are derived from the exercise of the licensed privilege to engage in a business or profession in the ordinary course of business.

According to the SBA, the PPP is a loan program designed to provide a direct incentive for small businesses to keep workers on their payroll. Borrowers may be eligible for loan forgiveness if the funds are used for eligible payroll costs, payments on business mortgage interest payments, rent or utilities during the covered period. In the case of PPP loans, it is questionable whether the loan proceeds result from the “exercise of the licensed privilege . . . in the ordinary course of business.” The primary purpose of the loans is to help businesses keep employees on the payroll during a period of extraordinary economic hardship caused by the coronavirus pandemic. Loan proceeds are not received by exercising the licensed privilege to do business by, for example, providing services or selling goods in the ordinary course of business.

Even if the loan proceeds could be considered gross receipts under the statutory and regulatory definition, Virginia Code § 58.1-3732 A 4 excludes receipts which are the proceeds of a loan transaction in which the licensee is the obligor. Although Virginia Code § 58.1-3732 A 4 does not expressly cover scenarios in which some part of all of a loan may be forgiven, the fact that a loan may eventually be forgiven does not change the character of the funds as proceeds of a loan transaction. The Department also observes that Virginia Code § 58.1-3732 A follows the regulatory definition of gross receipts, namely that gross receipts “shall not include any amount not derived from the exercise of the licensed privilege to engage in a business or profession in the ordinary course of business.” The eight exclusions specifically described thereafter, including the exclusion for loan proceeds, are examples of such amounts that are not derived from the exercise of the licensed privilege to engage in a business or profession in the ordinary course of business, as explained above.

Accordingly, in the Department’s opinion, loan proceeds paid out under the Paycheck Protection Program are not gross receipts for purposes of the BPOL tax, regardless of whether some part or all of such loans are forgivable or not.

If you have any questions regarding this opinion, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3655.M