US Small Businesses Scream As States Tax PPP Covid Rescue Loans
Lindsay DesLauriers was on a roll at the start of last year. Her family had recently purchased the Bolton Valley Resort in Vermont, which her father had initially developed in the 1960s. The business was on a “really positive growth trajectory,” she said. Then the pandemic struck.
Vermont’s March 2020 shutdown came at a terrible time for the resort, wiping out the last three weeks of the winter season as well as the income that sustains it during the lean summer months. DesLauriers went from 300 employees to eight.
So she rushed to apply for the Paycheck Protection Program, created by Congress to help small business owners like her. “It has completely changed the game for us,” said DesLauriers, which allowed him to rehire all of his staff year round.
The program allows most loans to eventually be canceled. DesLauriers also assumed the money would be tax free. But she was wrong.
Indeed, while the Internal Revenue Service will not grant tax exemption for PPP loans, Vermont has become one of 11 states – including California, Florida, Hawaii, Minnesota, Nevada, New Hampshire, North Carolina, Texas, Utah and Washington – who have chosen to tax P3 loans or have considered doing so. At least 10 other states turned the tide earlier this year and decided not to impose taxes, according to the Tax Foundation, a nonprofit policy think tank.
“We are at a disadvantage by our own state government,” DesLauriers said in late April. Many companies have delayed their launch in hopes that the situation may change. But even with re-openings underway, some hard-hit businesses face serious challenges if they are forced to pay. For small businesses, a few thousand dollars can huge difference.
“This is emergency aid in a crisis,” said Sarah Crozier, director of communications at Main Street Alliance, which represents small businesses. “The money no longer exists.
Small entrepreneurs are not the only ones to cry bait and trade. Some in Washington have criticized states for what they see as kicking their own residents while on the ground, against Congress intent. “Small businesses have been hit the hardest during this crisis,” said US Senator Ron Wyden, a Democrat from Oregon. “Any effort that makes it harder for them to come back will hamper our overall economic recovery.
Typically, a canceled loan is considered taxable income, but Congress, as part of last spring’s first pandemic bailout, ruled that PPP loans should be treated as tax-exempt. Then President Donald Trump blocked business owners claim deductions for business expenses paid with P3 money. When Congress passed the second coronavirus bailout in late 2020, it specifically allowed such deductions.
But when it comes to state taxes, some lawmakers refuse to comply with federal rules and treat P3 loans as taxable income, or prohibit businesses from deducting expenses paid with them, or both.
Even for states that choose just one of these options, “the impact on revenues is quite similar,” said Katherine Loughead, senior policy analyst at the Tax Foundation. If the funds are treated as taxable income, business owners must pay out of the amount they received. Regarding gate number two, under normal circumstances a business deducts regular expenses like payroll, rent, utilities, and mortgage payments to arrive at its taxable income. By preventing them from doing so with PPP money – which was specifically intended by Congress to cover these costs – states are forcing businesses to report higher taxable income, and therefore pay more taxes.
Critics of the tactic argue that many states have seen the taxation of PPP loans as a way to generate income in a brutal year without directly raising taxes, while some lawmakers have backed down by giving a pass to people. beneficiaries of PPP, given all the examples of large companies that cash in wrongly. But Loughead said the result in those states is a tax increase “on the very businesses that have struggled the most.”
And the damage to small businesses could last for years. Businesses that suffered massive losses at the worst of the pandemic would typically be able to defer them, in order to lower their future tax bills as they recover from a catastrophic year. But if they are forced to include PPP loans as taxable income or are unable to deduct expenses paid with these funds, those losses will appear artificially smaller.
“If you don’t allow it, you’ve basically tilted the playing field even more in favor of big business,” said Davis Senseman, founder of Davis Law Office in Minneapolis, which advises small business clients.
With tax day past, many small businesses have already filed their 2020 taxes rather than asking for extensions. If their state legislatures pass bills that treat P3 loans as tax-exempt, they may be able to reapply or request a refund. But Senseman said “there are tons of small business owners out there who don’t have good tax advice,” and therefore may not know such options exist.
Daryl McLinden, managing director of TMG Consulting in Chanhassen, Minnesota, said some of his clients may have to borrow money or sell assets to pay state taxes. Some of Senseman’s customers had discussed using their credit cards or taking out additional PPP loans just to cover their tax bills, although the loans used in this manner are not being canceled and will continue to bear interest. .
For Senseman, who took out a PPP loan for his law firm, counting the loan as income “would take me from a small loss to a small profit in a year when I was actually unprofitable. I would pay taxes on what looks like phantom income.
In the Minnesota State Senate, it was Democrats who blocked a bill that would have followed federal PPP tax guidelines. In explaining her vote against the bill, Senator Mary Kunesh pointed out profitable businesses that have received PPP funds intended for small businesses. “It was a protest vote,” the Democrat said. While Kunesh has said she wants to exempt small businesses from these taxes, she declined to say whether she would change her vote if given the opportunity.
Minnesota Senators Susan Kent and Jennifer McEwen, also Democrats, said they voted against the bill because Republicans rejected amendments that would also treat unemployment benefits as non-taxable income. “If we’re going to have tax compliance with the federal government, that’s fine,” McEwen said. “But it should be full and fair compliance, not one that is crafted for the benefit of the rich alone.”
The Vermont approach was more complicated. The state complied with federal tax treatment for 2020 PPP loans, but treated PPP loans received this year as taxable income, as well as those that were not canceled in 2020, although many homeowners company are still waiting to finalize their forgiveness papers.
Although DesLauriers applied for his first PPP loan in April 2020 and spent it in September, he was advised not to ask for a rebate right away as the rules kept changing. She didn’t make him forgive until this year, when she applied for a second PPP loan. DesLauriers declined to disclose how much she received under the program. “If we had known that of course we would have done this in 2020,” she said. “But we didn’t know there would be these serious consequences.”
More than 50 Vermont companies have signed a letter ask the legislature not to tax loans, from the Vermont chapter of the Main Street Alliance to the state chapter of the Chamber of Commerce. The groups may not always have the same political views, said Charles Martin, chamber director of government affairs, but they easily agreed that Congress had no intention of taxing loans.
Indeed, states taxing PPP loans are a mixture of blue and red, a rare phenomenon these days that brought together organizations more used to being enemies. “It was not difficult to find friends on this issue,” said Martin.
Ultimately, DesLauriers and other Vermont business owners may be able to breathe a little easier. The legislature in Montpellier last month moved to repeal the state tax on canceled federal PPP loans, retroactive to Jan. 1, sending the bill to Governor Phil Scott last week for his signature.
– With the help of Laura Davison