Tax Holidays & CARES Act Conformity in New Mexico
New Mexico State and Local Tax Coronavirus Update
Tax Holiday Legislation Passed February 24, 2021
New Mexico’s first session of the 55th State Legislature passed a measure that will provide coronavirus relief for bars and restaurants in the form of a four-month “tax holiday.”
Senate Bill 1 would create a four-month gross receipts tax deduction for several types of businesses on their sales of food and non-packaged beverages and a tax credit for individuals. Scheduled to begin March 1, 2021, and prior to July 1, 2021, receipts of a food or beverage establishment for the sales of prepared food—or non-packaged beverages that are served or picked up at the establishment, or are delivered to customers for immediate consumption—may be deducted from gross receipts.
Residents who received a Working Families Credit (WFC) for tax year 2020 and have an adjusted gross income of up to $31,200 for individuals (up to $39,000 for joint filers) would also receive a $600 refundable tax credit for the 2020 tax year.
The measure was passed by the House and Senate and now heads to the desk of New Mexico Governor Michelle Lujan Grisham for signature, who has advocated for pandemic-related financial relief.
Guidance Issued From the New Mexico Taxation & Revenue Department on Coronavirus Relief Payments
ECONOMIC IMPACT PAYMENTS (EIP) ARE NOT SUBJECT TO NEW MEXICO PERSONAL INCOME TAX
New Mexico personal income tax is calculated based upon the federal adjusted gross income (AGI). The Internal Revenue Service has provided clear guidance that direct payments made to individuals which are provided through the CARES Act are an advance of a tax credit for 2020 and therefore not included in federal gross income. Since the payments are not included in federal adjusted gross income, they are not included in New Mexico taxable income.
PAYCHECK PROTECTION PROGRAM (PPP) LOANS ARE NOT GROSS RECEIPTS
PPP loans were created by the CARES Act to allow businesses to continue to pay their workers and some overhead expenses. PPP funding is a loan and therefore does not meet the definition of gross receipts found in Section 7-9-3.5 NMSA 1978. This holds true even if the loan was forgiven.
INCOME TAX FEDERAL RULES DETERMINE WHETHER A PPP LOAN IS SUBJECT TO INCOME TAXES
In New Mexico, both personal and corporate income taxes are based on reported federal income and conform to the federal rules to determine if these loans are taxable. Personal income tax is determined by the federal AGI and then by allowing the standard or itemized deductions. Corporate income tax is based upon the federal taxable income before net operating loss and special deductions. Under current guidance from the IRS, PPP loan forgiveness is not considered canceled debt income and is therefore not taxable income in New Mexico.
MOST GRANTS RECEIVED THROUGH CARES ACT FUNDING ARE NOT SUBJECT TO GROSS RECEIPTS TAX
For an amount of money to be considered as gross receipts, the payment must be the result of an activity within the definition of gross receipts. Receiving a grant would normally not be considered under gross receipts unless the receipt of the grant required the recipient to perform a transaction, such as performing services. This means that most small business grants provided through funds made available through the CARES Act are not included in gross receipts.
INCOME TAX FEDERAL RULES DETERMINE WHETHER GRANT IS SUBJECT TO INCOME TAXES
A grant is likely taxable as income for most recipients, but each grant has its own rules and may have exclusions from tax in some cases. The IRS provided guidance earlier in the year that the income provided to businesses from the CARES Act is generally taxable. If the grant money is taxable at the federal level, it would be taxable at the state level. Furthermore, special rules apply to tribes, Pueblos, tribal corporations and entities for whom such grants are often not subject to income taxation.
New Mexico Net Operating Loss (NOL) Rules Do Not Conform To the CARES Act
House Bill 6, of the 2020 1st special legislative session signed into law by Governor Michelle Lujan Grisham on June 29, 2020, clarifies that New Mexico’s deduction for NOL will conform to the Internal Revenue Code as of January 1, 2018, prior to enactment of the CARES Act. The New Mexico NOL deduction will follow the rules adopted by the Tax Cuts and Jobs Act limiting NOL carryforward to 80%.
How REDW Can Help
For up-to-date guidance on all New Mexico legislative tax developments and CARES Act conformity contact REDW’s trusted state and local tax specialists. James Ortiz, State and Local Tax Principal, and Luis Giron, State and Local Tax Accountant, are ready to help provide you with tax insights and stability during a quickly-evolving tax climate.
REDW is committed to keeping you informed at all times, and especially through the impacts of the COVID-19 pandemic. Stay connected with us on LinkedIn and @REDWLLC on Twitter. Access some of our other updates on our COVID-19 Resource Hub.