Employees work at JIT Powder Coating in Farmington, Minnesota. The owner has an unforeseen problem with their PPP loan.
FARMINGTON, Minn. (FOX 9) – – Tim Milner saw the federal money last spring as a stroke of luck.
Milner, which owns JIT Powder Coating in Farmington, received a $ 500,000 loan through the federal paycheck protection program last spring when its sales declined during the pandemic-triggered recession.
The tough business was saved by PPP loans that faced state money taxes
Small businesses that got PPP loans to survive the COVID-19 pandemic are now surprised to learn they are facing government taxes on the money.
Milner used it to keep all 65 of his employees on the payroll and was under no obligation to repay the money under the terms of the program. But he and other Minnesota entrepreneurs are now faced with surprising tax burdens as the state taxes forgivable loans.
“When I sat with my accountants in mid-December and they told me that the $ 500,000 would be taxed at 9.8 percent, I was stunned. Absolutely stunned,” said Milner in an interview in his shop.
The paycheck protection program approved by Congress under the March 2020 Boom Bill to Reduce the Rising Unemployment Rate sent $ 11.3 billion to 102,352 Minnesota companies last year.
Entrepreneurs did not have to repay the money when they used it mainly to pay their workers. The program was funded as tax-free at the federal level.
However, Minnesota tax law is not set up to automatically comply with federal law, as about 20 states do. Instead, the legislature would have to make the change.
Because of this, Milner’s futile loan is subject to state corporate income tax, so he will be due a payment of $ 50,000 next month.
“We spent every last dollar on this (employee billing),” Milner said in an interview. “So the money is gone. So now you have to come up with $ 50,000 out of nowhere.”
Minnesota is the last state in the region to tax PPP loans as income. Wisconsin changed its law this week to give tens of thousands of businesses tax breaks. Iowa and North Dakota are federal law, while South Dakota is not taxed on income.
The Chairs of the House and Senate Tax Committees said in interviews that they support changes even though the bills are still awaiting a vote in their committees.
Tax-free PPP loans will cost $ 438 million over the next two years, State Revenue Department analysts estimated this week.
“I think the $ 438 million will be very difficult to realize, so it has to be targeted,” said Paul Marquart, Chairman of House Taxes, DFL-Dilworth. “I think we have to find a way to reach those who have been hit hardest.”
Senator Carla Nelson, the chairwoman of the Senate for Taxation, said her goal is to get a tax compliance bill for a Senate vote soon.
“The federal government will not tax PPP loans issued as income, and neither will the state of Minnesota,” said Nelson, R-Rochester.
In Minnesota, companies are taxed at a flat rate of 9.8 percent. Most companies are taxed at individual income tax rates that range from 5.35 to 9.85 percent.
Tax compliance is a top priority for corporate groups including the Minnesota Chamber of Commerce.
“That’s definitely the barrier to legislation, the cost of revenue ($ 438 million),” said Beth Kadoun, vice president of the Tax Policy Chamber. “But we don’t think the state should benefit from small businesses that have taken out this loan.”
Late last year, Congress approved a second round of PPP loans that approved 45,443 Minnesota companies for an additional $ 2.9 billion. This time, companies had to meet an income threshold in order to qualify.
Milner, who has received a second round of PPP funding, plans to use a portion of the new loan to pay the Minnesota taxes he owes from the first round.
“This is about the most ridiculous situation you could be in,” he said. “Take more money from the federal government, not to give it to the people, but to give it to the state.”