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Paycheck Protection Program (PPP) Tax and Deduction Clarifications

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Exclusions and Deductions

Paycheck Protection Program (PPP) Tax and Deduction Clarifications

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The Paycheck Protection Program (PPP) is a loan at first that becomes a grant if certain requirements are met.

To the extent the loans are forgiven under the CARES Act, the amounts are not included in gross income and are not taxable.

IRS Notice 2020-32 provides that the business expenses paid with the loan-grant money are not deductible for federal tax purposes. Because the PPP is a loan-grant and not a credit, 15-30-2110(4), MCA, does not apply and the business expenses offset by the grant are not deductible for Montana tax purposes either.

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Charitable Contributions

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Many charitable contributions are eligible for deduction from your federal and state adjusted gross income.

If you itemize your deductions, donations made by December 31 to qualifying charities may reduce your 2019 taxable income and could help bring you a larger refund in 2020. If you claim the standard deduction on your federal income tax return, you may still claim itemized deductions on your Montana return and lower your Montana income taxes.

You must make the charitable contributions by the end of the calendar year to deduct those contributions for that tax year.

Donations could be cash, vehicles, other items, or financial securities. Just make sure you keep proof of the donations, including receipts, and that you’re giving to an organization approved by the IRS for tax-deductible donations.

More information on charities, including protecting yourself against common charity scams and fraudulent organizations, is available from the Montana Department of Justice.

More on Charitable Contributions

The charitable contributions allowed as a deduction in computing your net income for Montana income tax purposes are the same contributions allowed as a deduction for federal income tax purposes made during the year—with the following exceptions:

  • You can include your contributions made to the Montana Veterans’ Service Special Revenue Account or the Montana State Veterans’ Cemetery program, or the surcharge you paid for purchasing a Montana patriotic specialty license plate, as itemized deductions on your Montana income tax return even if they are not allowed as itemized deductions on your federal return.
  • When you apply the federal 60 percent, 50 percent, 30 percent and 20 percent contribution limitations, use your Montana Adjusted Gross Income instead of your Federal Adjusted Gross Income when you determine your contributions that are allowed.
  • Any portion of a contribution that you used to calculate your Qualified Endowment Tax Credit, your Innovative Educational Program Credit, or your Student Scholarship Organization Credit, cannot also be claimed as a contribution deduction. You can claim a charitable deduction for that portion of the contribution not used to calculate this credit.

In general, excess charitable contributions can be carried over five years.

You may deduct your contributions to the Child Abuse and Neglect Prevention Program. If you decide to use the checkoff provided on your Contributions, Penalties, and Interest Schedule, you may deduct this contribution on the same return.

Contributions are subject to the federal substantiation requirements.

See IRS Publications 526 and 561 for more information.

Please Note:

If you are filing on paper and making a non-cash contribution of over $500, include a copy of your federal Form 8283 with your return.

Federal Income Tax Deductions on Montana Tax Returns

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Several tax practitioners contacted us about the itemized deduction for federal income taxes paid. The Form 2 instructions limit the amount of the itemized deduction to the amount of federal income taxes assessed on the 2018 federal Form 1040.

We call this the direct limitation method.

The tax practitioners were concerned they had already filed returns deducting federal income taxes paid without this limitation.

Our intention was to offer this direct limitation method as an alternative to the recovery method which requires a calculation spread over two tax years.

Both the direct limitation method or the recovery method are correct. Montana tax returns already filed do not need to be amended.

Please remember: The recovery method may require an addition to income in the next year.

Miscellaneous Itemized Deductions for Tax Year 2018

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The federal Tax Cuts and Jobs Act suspended all miscellaneous deductions referenced under IRC 67, for the tax years 2018 through 2025.

Miscellaneous itemized deductions are those deductions that would have been subject to the two percent of adjusted gross income limitation.  These deductions are also suspended for Montana income tax purposes.

The suspended deductions include, but are not limited to:

  • Unreimbursed employee expenses
  • Investment fees
  • Tax preparation fees
  • Most casualty and theft loss not related to income producing property

For tax year 2018, line 18 of the Montana Itemized Deductions Schedule refers to miscellaneous deductions that are not subject to the two percent floor and reportable on federal Form 1040, Schedule A, line 16, such as:

  • Net Qualified Disaster Losses, or
  • Deductions for the repayment of under a claim of right amounts such as Social Security benefits.

Casualty and theft losses of income-producing property and gambling losses, which are also deductible on federal Form 1040, Schedule A, line 16, are deductible on lines 15 and 17 respectively on the Montana Itemized Deductions Schedule.

Montana Individual Income Tax Return Form 2 Available in My Revenue

Military Spouse Filing Updates

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On December 31, 2018, the Servicemembers Civil Relief Act was amended so that a taxpayer moving to a state to be with their spouse who is a military servicemember may choose to use the tax residence of the military spouse.

Previously, when a taxpayer was not a resident of the state where his or her spouse was a resident for tax purposes, the Act did not provide protection against gaining tax residency in the state where the taxpayer moved to in order to be with their spouse.

A servicemember’s spouse can now elect to be protected by the Act by choosing the tax residency of the servicemember when filing their state income tax return.

The Act also exempts spouses who are not residents of Montana for tax purposes from paying income tax on the wages they earn in the state. The protection does not apply to a spouse that is already a resident of Montana or who elects to be a resident of Montana.

Clarifications Regarding the Deductibility of Federal Income Taxes

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As in previous years, you can deduct up to $5,000 of federal income taxes paid on your Itemized Deductions Schedule, line 4. At the request of some tax practitioners, the instructions on Form 2, page 21, now include a list of the deductible federal income taxes. For example, the Self-Employment Tax is not on the list and is not deductible.

However, when you pay your federal taxes as you go, you often pay income taxes and other taxes together. You will not know how much federal income taxes you have paid until your federal Form 1040 is completed. As a result, if your federal tax payments were greater than your federal income taxes calculated on your federal return, the excess will include other taxes and/or an overpayment, neither of which can provide a tax benefit for Montana.

Example

In the following example, the amount of federal income tax paid in 2018 that you can use to reduce Montana Taxable income is $4,000 ($11,000 – $6,000 – $1,000 = $4,000)

Federal wage withholding paid in 2018:
$5,000
Federal estimated tax paid in 2018:
$6,000
Total paid in 2018:
$11,000
Deductible income tax reported on your 2018 Form 1040:
$4,000
Other taxes and liabilities on your 2018 Form 1040:
$6,000
Total liabilities for 2018:
$10, 000
Overpayment:
$1,000

If you determine that the overpayment ($1,000 in the example) was a payment based on an estimate of income taxes alone, you can still deduct this amount as an itemized deduction, provided the limit of $5,000 has not been reached. However, this amount would have to be recovered on the 2019 tax return, because you cannot receive a tax benefit from that payment for Montana income tax purposes.

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