Nearly 90,000 small businesses in Wisconsin that have borrowed under the Federal Paycheck Protection Program (PPP) will face hundreds of millions of dollars in federal income tax liability this spring, even though the loans are federally tax-free. Unless lawmakers act, companies that have received PPP loans and related government assistance will face $ 457 million in government taxes by 2024 – more than half of those taxes will be due in the spring -, though Wisconsin is on track to continue to see overall fund revenue growth amid the pandemic.
Under applicable Wisconsin law, first round PPP loans (which were issued in 2020) are not treated as taxable income, but expenses paid for the use of these loans cannot be used for the customary expense allowance. This means that Wisconsin companies that have taken out PPP loans will have higher taxable income in Wisconsin than they would have if they hadn’t used the federal lifeline. Second round PPP loans (which were issued in 2021) are also on track to be taxed by the state, albeit in the opposite way: expenses will be deductible, but the loans will be treated as taxable income.
This complex and burdensome treatment is because of the strange way that Wisconsin tax law currently stands in relation to federal tax law. In general, Wisconsin complies with the Internal Revenue Code (IRC) in place as of December 31, 2017, which states that loans issued are generally treated as taxable income and that normal business expenses (such as payroll, rent, and utilities) are of course deductible. Because of this, with no legislative action, Wisconsin remains willing to treat second-round PPP loans as taxable income, but deduct the associated costs.
While Wisconsin is largely in line with an outdated version of the IRC, lawmakers have selectively adopted certain federal tax changes, including the CARES Act provision that states that first-round PPP loans are not treated as taxable income. Although lawmaker and Governor Tony Evers (D) reached an agreement last April with the enactment of AB 1038 to exclude issued PPP loan amounts from taxable income, a notice issued last week by the Wisconsin Treasury Department signals the state’s plans to do so to refuse to do the deduction. If PPP-covered spending were denied, the customary cost deduction would have an effect similar to taxing the loan granted as income, an outcome Wisconsin policymakers have already tried to avoid.
Interestingly, the US Congress encountered the same problems. When they decided in the CARES Act to exclude the issued credits from income, the finance department concluded that excluding issued PPP credits from taxable income would, under their interpretation of applicable law, trigger a refusal to deduct business expenses – a finding that this made the tax-free treatment of granted PPP loans by the CARES Act essentially meaningless. Congress solved this problem with the passage of the Consolidated Appropriations Act in December – a change in law to ensure that expenses that are covered are deductible. However, by being compliant with the outdated federal language, Wisconsin is on track to deny the expense allowance, with the Treasury Department relying on the Treasury Department’s now-repealed decision as an accurate interpretation of the law as it previously existed in a Wisconsin version still compliant. By deliberately complying only with the original CARES Act provision on lending, and not the current IRC as a whole or the broader provisions of the two federal laws, the goal of Wisconsin lawmakers to change the tax treatment of PPP loan income has thwarted.
The good news is that it is not too late for state policymakers to accept the technical fix passed by Congress, as some Wisconsin lawmakers have suggested. This would save Wisconsin’s PPP recipients – including restaurants, bars, milk producers, and salons – from paying hundreds of millions of dollars in unexpected tax bill on that tax day. If they don’t act, Wisconsin’s nearly 90,000 PPP loan recipients will have to hunt for cash to pay surprise tax bills for federal aid that should never be taxed.
Wisconsin policymakers should now reassure these employers and avoid adding to the immense financial and administrative burdens that countless entrepreneurs and their employees face even amid the pandemic. An increase in tax liability now would lead to more injured small businesses, permanent closings and more job losses – the very result that the PPP was primarily intended to prevent.
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