The state government could face more than $ 100 million in lost revenue if the state fully complies with changes to federal tax law passed by Congress in December, including provisions for Maine businesses that have received Paycheck Protection Program loans would adhere to.
The question at stake is whether companies will be able to deduct expenses paid with federal government PPP loans under state tax law. The program, which was passed by Congress last spring to help companies weather the COVID-19 pandemic and keep workers on payroll, added $ 2.3 billion to the economy of $ 2.3 billion during the pandemic Maine brought in.
In January, the US Treasury Department approved an additional $ 284 million in PPP funding. And some Maine companies would be eligible for a second loan.
Legislature testified to a supplementary budget proposal from the government of Governor Janet Mills, a Democrat, that would go along with the federal government’s decision to exempt PPP loans from income tax. However, it is not in line with the policy of the federal government that expenses paid with PPP funds are also tax deductible.
Representatives of the Maine State Chamber of Commerce, the National Federation of Small Businesses and Hospitality in Maine, which includes over 1,000 restaurants and hotels in the state, urged lawmakers to comply with the latest federal law that does not just affect the amount of PPP loans granted exempt from taxation but also allows companies to deduct the costs paid through PPP loans from their overall bottom line.
If the business world prevailed, not only would the recipients of PPP loans not have negative tax consequences, but would actually receive a net tax benefit if they could deduct the costs paid with PPP funds.
Greg Dugal, of Hospitality Maine, said the loss of income caused by pandemic-induced hospitality restrictions was five times higher than the losses incurred during the Great Recession in 2009.
“Without the PPP and Maine’s recovery grants, half of our industry would cease to exist by 2021,” said Dugal. “In this devastating economic era, we all know for a fact that small businesses shouldn’t receive unexpected income tax bills of $ 1,000 or more based on a federal government bailout.”
Dugal said the bill would come at the worst possible time for restaurants and accommodation – at the height of winter – when outdoor dining is dramatically restricted and most businesses run out of cash.
“It will also be a time when they need money to buy supplies to reopen or ramp up for the upcoming summer and fall seasons and possibly the end of the pandemic,” Dugal said.
Dugal noted that Maine recovery grants offered by the Mills administration using federal CARES law would also be taxable. Dugal said the industry is grateful for state and federal funds that have been used to save the hospitality industry, but an additional tax burden could “be the last straw for some companies”.
And the clock is ticking for the 2020 tax return season, said Patricia Brigham, executive director of the Maine Society of Certified Public Accountants.
“As the de facto tax advisor to so many small businesses in the state, we urge you to review compliance,” Brigham told legislative committees on funds, finance and taxation. Brigham said accountants understand this would become a new government expense, but she said it would not create new financial uncertainty and reduce cash flow for many Maine companies that are still working to get out of one of the pandemics limited economy to recover.
“In general, compliance provides businesses and auditors with predictability and greatly streamlines the tax filing process so that organizations can focus on their business, not necessarily their tax filings,” said Brigham.
Rapidly changing federal tax legislation, backed by the federal government’s ability to deficit spending, has failed Maine and other states, most of which have constitutional requirements for budget balance.
While Congress has sent billions of dollars to states to help them respond to the COVID-19 pandemic, it has failed to allocate resources that will enable states to replenish tax revenues from a pandemic-crippled economy have been lost.
Fred Brewer, a Bath CPA, said he and many of his clients recognized the situation the government was facing and while urging lawmakers to pass new budget and tax laws that complied with the federal code, it was also important that they get the job done quickly.
According to Brewer, around 40 percent of its customers received PPP funding across the spectrum. He said companies he works with have a number of responses to the possibility that the state would not exempt expenses paid for with PPP funds.
“I want to convince you of the importance of making this decision quickly,” said Brewer. “Even if you make this decision today so that we can start processing tax returns, you will have at least two to three weeks before the tax preparation software can be updated for any changes you have made.”
Not all of those who testified were in favor of full compliance with federal tax legislation.
Sarah Austin of the Maine Center for Economic Policy, a left-wing organization advocating economic policies that help low-income Mainians, said many of the federal tax breaks went to companies that weathered the pandemic well, including real estate agents and hedging fund managers.
“Maine is in a better position to focus the resources all Mainers need in order to overcome this pandemic,” Austin said. “These are safe schools, access to health care, childcare, good infrastructure and job protection.”
Austin also noted that while PPP loans were tax-free, unemployment benefits for workers who lost their jobs during the pandemic were not.
This story will be updated.
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