Taxing the Cash That Saved Virginia Jobs

From Steve Haner

Concern that Virginia is attempting to tax federal pandemic aid grants to Virginia businesses – grants that the Virginians have been employed on – jeopardizes normally routine tax administration.

The House Finance Committee on Monday approved the annual bill to bring Virginia tax law into line with the Internal Revenue Code effective December 31, 2020. However, eight of the 22 committee members voted no, and a similar division across the House would kill the bill. The bill must come into force immediately in order for it to be reflected in the tax returns that are currently being prepared. However, this requires an 80% super majority.

The Thomas Jefferson Institute for Public Policy, along with the National Federation of Independent Business and the Virginia Society of Certified Public Accounts, rejected part of the bill in committee (see link). While Congress told PPP loan companies that they can deduct the wages and salaries they kept on to earn the loan forgiveness, Virginia wants to ban those costs as a deduction.

This effectively taxes the loan made. Consider the following simple example.

Acme Inc. struggled through the pandemic with sales of $ 200,000 and operating costs of $ 200,000. On this basis alone, it would not show a profit for 2020 and thus owe no federal or state income tax.

Add a $ 100,000 PPP loan and this is how things change: Acme is spending the money as Congress intended and mostly keeping payroll. The PPP loan is not treated as income. that is undisputed. But this time, when Acme calculates its taxable state income, it can only deduct $ 100,000 of its costs from its $ 200,000 in sales. That leaves a taxable gain of $ 100,000 on the government yield.

Is the resulting tax on the loan or on the profit resulting from the loan? It doesn’t make a difference. There would be no tax if there wasn’t a loan. Without the loan there could be no society.

Tax policy will be scrutinized by the entire House of Representatives later this week. Here is the current text and here is the previous invoice history. A similar bill from the Senate is still pending.

When the PPP program was set out in the COVID Relief CARES Act last spring, it was clear that the loan would be granted if a company took out the loan and kept its payroll and operations. It was also clear that the loan made would not be considered taxable income. However, that bill did not provide any information on the tax treatment of the company’s ongoing operating expenses, which eliminated the need to repay the loan dollar for dollar.

In interpreting the CARES Act last year, the US Treasury Department ruled that the cost could not be deducted. In December, in the final round of COVID relief laws, Congress reversed the Treasury. The December law, when used as intended to keep the company’s payroll up, turned the loans into tax-free grants. If the deductions on state returns are not allowed, they will revert to taxable income in Virginia.

Secretary Layne told the committee Monday that it was not fair to allow these deductions to be made for the companies that received PPP loans as not every company received one. “This would be a different analysis if everyone had received PPP loans,” he said. He went on to say that about 50% of the loans nationwide went to five percent of companies, which were often quite large.

Companies that didn’t get PPP loans often got bank loans when they could to keep the doors open, he said. But it appears that around 113,000 Virginia companies have received PPP loans, so this policy debate will have a huge impact on some of them.

Layne also noted that the state and local programs that provide similar grants for the recovery of businesses that are typically much smaller expect recipients to treat these grants as income. If so, this inequality could be addressed by doing for them what Congress did for PPP funding.

The state believes that if PPP-related costs can also be fully deducted, income tax revenues will be reduced by $ 340 million to $ 500 million in two years. That shows you how much money went into PPP to keep Virginia businesses alive and well.

“I would agree that it was always (the intent of Congress) to allow deductibility,” said Delegate Joseph McNamara, R-Salem, who had offered his own bill on PPP tax issues and another bill to return to Virginia to bring them into rolling conformity. Both were submitted after the administrative draft, sponsored by Delegate Vivian Watts, D-Annandale, advanced 14-8. If all of the lawmakers are in later this week, 21 votes in the entire House will defeat it.

A year ago, before the pandemic, PPP wasn’t even on anyone’s radar screen. The federal government created it to bail out businesses in a sudden deep recession, with much of the problem being caused by the government’s own restrictions and lockdowns. Virginia now wants to tax this bailout if Congress doesn’t? The Thomas Jefferson Institute is against it.

Originally published this morning by the Thomas Jefferson Institute of Public Policy.

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