PPP Paycheck Protection Program written as SBA loan on the mask and money.
What was supposed to be routine tax law turned into a vehicle for a tax break of $ 450 million or more for companies in Wisconsin that received federal loans to help them with the pandemic.
The proposed change would allow a company to make a tax deduction on expenses incurred as a result of the pandemic – expenses that were already covered by a tax-free federal grant.
It’s “double dipping,” says Adam Thimmesch, a Nebraska law professor who analyzed the problem for a national tax newsletter. “You don’t have to report the income – and you subtract the expenses.”
The state’s largest business lobby, Wisconsin Manufacturers & Commerce, has campaigned hard for change. that without saying it“Employers could expect hundreds of millions of dollars in unexpected taxes.”
On Tuesday, Peter Barca, Secretary of the Wisconsin Treasury (DOR) told WMC that some of his claims were “false”.
The issue will be discussed in the legislature’s Joint Finance Committee on Wednesday when the committee votes on whether to add a tax break-creating change to a routine law to update Wisconsin’s tax laws.
The anticipated tax break is tied to the Paycheck Protection Program (PPP), a loan and grant program designed to support small businesses affected by the COVID-19 pandemic. The PPP was part of the Federal Act on Aid, Aid and Economic Security (Coresavirus Aid, Relief and Economic Security) passed at the end of March. The Consolidated Appropriations Act (CAA), which Congress passed in December, approved a new round of PPP funding.
As part of the PPP, which is administered by the US Small Business Administration, employers can apply for loans to continue working in the context of the COVID-19 pandemic. The PPP money a company receives is used to cover certain expenses.
Companies and nonprofits that receive the loans can have them extended – by converting the loans into grants if they meet certain criteria.
PPP money is tax free
The CARES Act provides that PPP grants are not taxed as income. Wisconsin Act 185, the state law passed in April implementing the CARES Act, also treats the PPP grants as tax-free income.
According to Michael Mazerov of the Center on Budget and Policy Priorities (CBPP) in Washington, DC, who wrote about the problem in, this is a departure from the “normal tax treatment of debt relief,” which treats funds as income a blog post for the think tank.
“In accordance with other provisions of the federal tax law,” wrote Mazerov, the IRS ruled that expenses that a PPP-covered company cannot deduct from their taxable income, just as people cannot deduct medical expenses covered by their health insurance reimburse them.
Thimmesch, a law professor at the University of Nebraska, compares the reasoning to how tax law treats employees’ business expenses when reimbursed by employers.
If an employer includes the reimbursement in the employee’s W-2 income statement, the employee can make a tax deduction on the cost. “Or they exclude reimbursement from your income, but then you cannot deduct the costs,” says Thimmesch. “You get one or the other. You do not deduct any expenses that you did not pay financially because someone else reimbursed you. “
In December, however, Congress passed the CAA. In addition to opening a new round of PPP funding, the CAA included a provision to overturn the IRS decision. The law allows companies not to report the PPP grant money as income on their federal tax returns, but also to deduct the expenses that the money covers from their income.
States with tax codes that are automatically updated to comply with federal tax law have the same tax break extended to those states. However, other states – including Wisconsin – are not automatically updated with federal law.
In an analysis published in the newsletter on January 11th Tax informationThimmesch contrasted with how a company that can already deduct expenses covered by PPP funds could be compared to an otherwise similar company that did not receive PPP funds. (The paper is behind a paywall, but Thimmesch outlined some early thoughts on his analysis for a blog entry.)
The company without PPP help “would include its entire income as taxable income,” explains Thimmesch in a telephone interview. “You could deduct your expenses, but you have to fund it with your own money.”
He continues: “The PPP recipient would have the federal government fund these expenses, still be able to withdraw them as if they had paid for it, but keep all of that [PPP] Cashbox. However, these two companies are expected to pay the same amount of state taxes. “
According to Thimmesch, the potential costs for states that do not automatically adhere to federal regulations are considerable – and all the more so since states, unlike the federal government, have to balance their budgets.
Business lobby campaign
Last month, WMC launched a campaign calling on lawmakers to amend Wisconsin law to align it with the state treatment of expenses covered by the tax-free PPP grants. Accuse DOR a “surprise tax hike of $ 450 million”. The organization sent a letter to the state legislature You are encouraged to take steps to meet the federal tax break.
In the letter, DOR is repeatedly referred to as a plan to “tax these loans” and as an indication that “the loans available are actually taxable”. WMC also accused the agency of reversing course.
In his letter to the business lobby on Tuesday, Barca questioned these descriptions.
In Act 185, Wisconsin passed the CARES Act provision “which ensures that the PPP loans or grants do not result in an income tax liability,” wrote Barca.
“We understand that your request is not just not to tax PPP loans, but to offer the double benefit of excluding the income and also allowing the deductions for expenses related to PPP loans,” added Barca. “Instead of a neutral net result, the double benefit leads to a new positive tax result for the PPP recipient and a tax liability for the state.”
He claimed that “there has been no reversal” in DOR’s treatment of PPP-covered spending. “The guidelines we publish follow current Wisconsin law,” the letter said. “We have to wait for new laws to be passed in Wisconsin before we can administer them.”
Republican lawmakers introduced changes that would extend federal tax breaks to state tax laws. The changes were proposed for two different bills: STARTING AT 2 in the Assembly and their counterpart in the Senate, SB-2. Both bills go through the committee processes in their respective houses of the legislature.
The accompanying invoices were originally written to accommodate a number of routine and largely technical changes required in state tax laws, and were supported by DOR when the assembly version had a public hearing on Jan. 21.
However, on February 4, the Senate Committee on Financial Institutions and Revenue voted 3-2 in favor of party lines a change to SB-2 who would make tax-deductible expenses that are covered by the PPP grants. In the congregation, the Republicans offered one similar change to AB-2 on February 5th, two and a half weeks after the bill passed the Means and Ways Committee with the support of both parties.
THE MORNING NEWSLETTER
A DOR executive summary communicated to state lawmakers says the changes are estimated to cost about $ 450 million. The Joint Finance Committee will address AB-2 and the PPP grant amendment to this law on Wednesday.
Senate minority chairman Gordon Hintz (D-Oshkosh) beat up GOP leaders Tuesday, stating that in applying the change process they “avoided a public hearing because they did not want to raise awareness that they were 450 million Spending US dollars in the least effective and unfair ways. “
According to the Small Business Administration, in the first round of PPPs, nearly 75% of the $ 9.9 million PPP funding went to Wisconsin to just under 14% of recipients whose loans ranged from $ 150,000 to $ 10 million. Meanwhile, 25% of PPP money in the state came from loans less than $ 150,000 – that’s 86% of recipients.
In short, the bulk of the PPP dollars went to the larger recipients who would take the greatest advantage of being able to deduct the costs paid by the PPP program.
“That’s a pretty inefficient, ineffective use of taxpayers’ money,” says Hintz. “I think there would be a lot of support to provide $ 450 million to businesses in need, especially in the affected sectors.”