Barring legislative intervention, tens of thousands of Minnesota businesses that received federal loans to retain employees during the pandemic will face a new financial predicament when they file their state taxes.
Those whose Payroll Protection Program loans were forgiven face higher state tax bills because the law treats the written-off debt as income. The Legislature is weighing potential fixes, but could be hamstrung by the state’s own budget problems and a $440 million price tag if every loan gets a pass.
It’s a top priority of the business lobby, including the Minnesota Chamber of Commerce, during a session where corporations are fighting off proposals to increase tax rates. But every dollar put toward a break on PPP loans is one that can’t be spent on schools, health care and other programs, meaning a tax change of any size faces stiff competition.
Certified public accountant Todd Koch has had to break the news to his business clients, who were caught off guard by the possible tax consequences.
“It is the same impact as if you had sold additional goods,” Koch said.
Koch said the jockeying to get a loan last year and steps businesses needed to take to comply were the initial priority.
“Everyone was so concentrated on getting through the whole pandemic, just trying to survive. And they’re hearing about all the federal rules,” Koch said. “Basically no one was paying attention. The clients weren’t paying attention to the state impacts.”
The PPP loans came with an enticement: Spend a majority of the money on payroll within a set time frame (some had eight weeks and others had six months) and the loan would be forgiven. No principal payback or interest would be due. In late December, Congress passed a law that made clear no federal tax would be charged on the forgiven loans.
But Minnesota isn’t among the states that automatically match up to the federal tax code. Usually, Minnesota lawmakers decide which deductions, subtractions and exclusions to adopt, sometimes considering how much they’d cost the state treasury.
All of Minnesota’s neighbors have opted to follow the federal tax treatment on PPP loans, with Wisconsin joining the list last week.
The first two PPP rounds sent loans to 102,000 Minnesota businesses that shared in more than $11 billion in loans. The smallest was $42 to a sole proprietor in White Bear Lake and the largest were $10 million loans to law firms, food processors and health companies.
JIT Powder Coating Co. in Farmington landed loans of slightly more than $550,000 last year and again this year.
“That loan was used exclusively for payroll,” owner Tim Milner said.
Milner told a House committee recently that he kept his 60 or so employees going at 40 hours per week even though there wasn’t that much work due to a reduction in sales.
“It’s not a windfall to me personally as a business owner,” Milner said. “This is something that was given to my employees. It was given to them to keep them viable, to keep them moving during a pandemic.”
Milner said it meant Minnesota already got a cut through payroll withholding taxes. He argues it’s not fair that the state now wants to charge him a roughly 10 percent tax rate on the forgiven loan.
Joe Piket said the PPP loan he got covered about two and a half months worth of payroll for his 65 employees at a pair of west suburban child care centers.
“I was not thinking about the tax implications at the time,” Piket said. “I was just trying to figure out how to make it through the next six months to stay open for our families that needed us.”
Had he known about the tax obligations, he might have gone a different direction — laying off half of his staff because of sliding enrollment. And that, he said, would have been a bigger burden on state resources.
“But I essentially, in a way, subsidized the state unemployment system by keeping people on that I didn’t have to have on at that time,” he said.
Lawmakers are trying to figure out if they'll cut businesses a break and where to draw the line. A revised economic forecast due Friday is likely to show improvements to Minnesota’s finances, perhaps giving a lift to relief proposals.
House Taxes Committee Chair Paul Marquart, DFL-Dilworth, said it could mean taking a close look at what the loans did for businesses.
“We need to find a way that we can target to those who are hit the hardest,” Marquart said. “It may be large; it may be small.”
Rep. Kaohly Her, DFL-St. Paul, said there should be a distinction between small businesses and larger corporations that qualified for help — some through workarounds.
“The largest corporations continue to get the breaks that they really don’t need,” she said. “And we do know that during this pandemic a lot of corporations, a lot of big companies did very well during this time period.”
Gov. Tim Walz, a DFLer, didn't include the relief in his budget but said this week that he's open to that possibility.
"I'm more than willing to have that conversation,” Walz said, noting that there are financial constraints that must be accounted for. “It's certainly not intended to punish those very businesses it helped."
Sen. Tom Bakk, an Republican-aligned independent from Cook, is sponsoring the PPP loan exclusion bill in the Senate. He worries that even if Friday’s forecast shows there’s more money available, a deal could be tough to get in time for 2020 tax filing deadlines.
That would mean some business owners could have to pony up now and hope they'll get the money back down the road.
“I don’t think people should try to hold this provision as kind of a chip in the final negotiations,” Bakk said. “It’s going to make a terrible inconvenience for people if it ends up being done as part of the end.”
Reporter Peter Cox contributed to this report.
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