The New Jersey Division of Taxation recently referenced their position on how to treat certain loans, grants, and cancellation of debt (COD) on your New Jersey Income tax Return. For personal income tax (GIT) purposes, cancellation or forgiveness of debt is not subject to tax. This includes student loan forgiveness, which many taxpayers may soon be experiencing if President Joe Biden’s executive order is not held up by the courts. Taxpayers will not be required to report any forgiveness or cancellation of debt on their NJ Income Tax Return.
For Corporation Business Tax (CBT), cancellation of debt is taxable when it is subject to tax for federal purposes. This is important information for businesses that have received Paycheck Protection Program (PPP) loans, as well as loans and/or grants from the Small Business Administration (SBA). Typically, loans and grants related to COVID-19 economic relief are not taxable for federal tax purposes. This remains true for PPP loans, as no income tax is paid on these proceeds and all expenses paid with these payments can be deducted fully. PPP loans should not be reported anywhere on a NJ Individual Tax Return (NJ-1040, NJ-10040NR, NJ-1041). Any COVID related grants are non-taxable and should not be reported as income on both NJ Gross Income Tax and Corporation Business Tax Returns. However, grants that are not providing COVID relief are treated differently for NJ Gross Income Tax and Corporation Tax. For NJ Gross Income Tax, there is no specific category of taxable income that grants would fall into, therefore they are treated as non-taxable and do not need to be reported on a New Jersey Income Tax Return. For Corporation Business Tax, if a grant not related to COVID relief is included in federal taxable income, it should be included in New Jersey income as well and reported on a New Jersey Corporation Business Tax Return.