Companies receiving federal pandemic support have the prospect of a state income tax shock

Many companies that have struggled to stay afloat through the pandemic are now facing the prospect … [+] Paying state income tax on state aid received under the Paycheck Protection Program enacted under the CARES Act.


The Paycheck Protection Program (PPP), which Congress passed in 2020 as part of the CARES Act Covid-19 aid package, has provided thousands of small businesses with an economic lifeline in the form of forgeable loans. Because the PPP program was designed to provide assistance to distressed employers and help them earn payrolls and rents, Congress drafted the CARES bill so that PPP loans made would not be subject to federal income tax.

When the CARES bill was passed in April 2020, it was expected that states would follow suit and also avoid taxing corporate PPP aid. After lawmakers returned to state capitals for the 2021 legislature, lawmakers and governors in a number of states are now making it clear that they plan to make PPP subsidies subject to state taxation.

For businesses that have relied on PPP help and spent all of the proceeds on payroll and rent in accordance with federal requirements for the loan, many do not have sufficient resources to cover a state income tax liability that many PPP recipients do not once had to know when they received and used their PPP funds.

“It might be what overwhelms some companies when it comes to folding,” said Michael Sputnik, owner of Signarama, a small business based in Braintree, Massachusetts, where state lawmakers have made it clear they won’t approve the same Income tax exemptions for PPP grants at the state level and from Congress at the federal level.

“I understand the state hurts for money too, but I don’t think this is the time they should take it from companies affected by the pandemic,” added Sputnik. “There comes a time when you look at taxes and see what is right and what is right is not to tax our businesses at this point,” said Patrick O’Connor, Massachusetts State Senator (R- Weymouth).

Massachusetts isn’t the only state where lawmakers plan to apply state income tax to PPP loans. Virginia lawmakers have proposed a law, House Bill 1935, that fails to align state tax laws with the federal law’s Congressional exemption from PPP funds, making PPP loans made subject to the Virginia personal income tax rate of 5.75%. It is estimated that by submitting PPP funds to Virginia income tax, $ 1 billion will be deducted from PPP recipients into state coffers.

“This is a cash robbery from the pockets of afflicted small businesses that lost so much revenue when the government shut them down and through no fault of their own,” said Nicole Riley, Virginia State director for the National Federation of Independent Business. “The legislator just wants to spend more money, but with this bill these costs fall on the backs of the small business owners.”

The efforts of Democratic lawmakers, who control both houses of the Virginia legislature, to tax PPP loans have been criticized by those in the restaurant, travel, and hospitality industries who have been hit by the pandemic and now have the prospect of one Send part of PPP funds they received, and in most cases already spent, to tax collectors in Richmond. Not only has this industry been hit hard by the pandemic, many business owners are expected to jump from $ 7.75 an hour to $ 9.50 an hour this coming May, and climb again to $ 11 an hour in January 2022.

“None of these should be considered individually,” said Robert Melvin – director of government affairs for the Virginia Restaurant, Lodging & Travel Association – of the changes in state policy that are adversely affecting the hospitality industry.

“Entrepreneurs who have taken out PPP loans must keep two books – one for the IRS and one for the state tax office,” said Ryan Ellis, a Virginia-based IRS agent at his own tax preparation firm. “You have to find out which wages and rents were paid in issued PPP dollars and which were not. It’s going to be a logistical nightmare in accounting, on top of a surprise tax bill. “

Wisconsin is another state where corporations must pay state income tax on PPP loans unless lawmakers pass new laws to prevent it. The Wisconsin Department of the Treasury issued guidance on Jan. 15 clarifying that corporations will owe state income tax on PPP loans even though the same funds are federal income tax exempt.

“Wisconsin law follows federal law before changes are made by law,” states the Wisconsin Department of Revenue Guidance. “As such, expenses paid in PPP forgivable funds are not deductible for Wisconsin income / franchise tax purposes.”

These new guidelines were not the understanding of Wisconsin lawmakers or the Treasury Department itself in April 2020 when Badger State lawmakers passed laws in line with CARES.

“Wisconsin lawmakers thought they would stick to federal tax law last year that exempted PPP funds from taxation,” Ellis said. “Only after the passage of this compliance law was Congress informed by the finance department that the CARES law, as amended, does not exempt PPP funds from taxation. Because of that, Congress came back and passed a follow-up law amending the CARES Act to clarify that PPP funds were income tax exempt. Unfortunately for businesses in Wisconsin, Madison lawmakers revised the CARES bill before Congress passed the Purge bill that made it clear that PPP funds are tax-free. Because of this, Wisconsin PPP funds are still subject to state income tax unless lawmakers act. “

Governor Tony Evers (D) has reportedly announced that he will veto the legislation to exempt PPP funds from state taxation if such a bill is sent to his desk. While Wisconsin lawmakers must act to prevent their constituents from owing state income taxes on their PPP relief funds, Illinois corporations that have received PPP funding do not owe state income taxes until Illinois lawmakers on the matter Take action and Governor JB Pritzker continues to fail.

During the recently completed Lame Duck session of the Illinois Legislature, Governor Pritzker urged lawmakers to pass a bill deforming the federal code’s exemption from PPP aid and making it subject to Illinois state income tax of 4.95% . Just as Governor Pritzker failed to convince Illinois voters to join his 2020 election drive to increase income tax, he failed to convince lawmakers in January 2021 to tax PPP aid recipients, which is an estimated $ 1 would be a billion.

“The failure could increase the budget deficit from $ 3.9 billion to $ 4.9 billion, said Rep. Mike Zalewski,” writes Joe Barnas of the Illinois Policy Institute. “While he said the bill might re-emerge in March, the idea that taxpayers could feel double-crossed would make it difficult for lawmakers to sell them.”

There will be a lot of activity on that front in the coming weeks as governors and lawmakers in places like Wisconsin realize they need to take steps to protect their constituents from unexpected tax hikes. In the meantime, expect governors and lawmakers in Illinois, Virginia, Massachusetts, and elsewhere to look for additional revenue by trying to tax PPP funds.