Washington’s nearly unique status as a state with no income tax has raised some consternation among businesses receiving financial relief under the CARES Act, including but not limited to the federal paycheck protection program (PPP) about their potential liability for the state Business and Occupation (B&O) tax. Similar to the ongoing confusion and uncertainty regarding federal income tax treatment of PPP loan forgiveness — see our May 1 Legal Update on IRS Notice 2020-32, which a number of senators have since implored the Treasury to change — the ultimate answer is currently uncertain.
In a recent article posted on Washington Department of Revenue’s (WDOR) website, titled “Federal financial assistance regarding COVID-19,” the Department acknowledges that “many businesses are receiving federal financial assistance to cope with the impacts of the COVID-19” and that it has been receiving questions whether such assistance is subject to Washington B&O tax. The article does not take a position on the topic, but it does state that businesses receiving federal assistance (including loan forgiveness under the PPP) “should NOT report” such amounts on their Washington tax returns and “should NOT pay” B&O tax on those amounts “at the present time.” (Emphasis in original.)
WDOR is deferring a decision until it more closely analyzes both the various programs and current tax statutes. WDOR also expects that its delay will provide an opportunity for the legislature to “clarify applicable statutes.” Consequently “no penalties or interest will accrue with regard to any tax that may be due on such receipts until further notice.”
The “until further notice” phrase, however, should give businesses some pause as WDOR can and might change its position. What should a business do in the meantime? The best course is to follow the guidance and not report the amounts received and not pay B&O tax on those amounts, but to the extent possible, don’t spend what might be owed, at least until the issue is fully resolved.
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