Taxing PPP loan income would be a disaster for many Minnesota small businesses | Opinion
A nail salon, as pictured on May 20, 2020, one of many Minnesota businesses shuttered at the time as part of the state’s response to the COVID-19 pandemic. Rilyn Eischens/Minnesota Reformer
About three years ago I testified before the Minnesota House Taxes Committee representing the Main Street Alliance of Minnesota, a coalition of business owners who work toward a more equitable and fair state for all. I also testified as someone who helps those same small business owners in my work as an attorney and advisor.
The debate was about what’s called “tax conformity,” which works like this: If the federal government allows some new deduction or says that a certain kind of income shouldn’t be taxed, Minnesota has to decide to go along or not in its own tax code. Hence “conforming” the Minnesota tax code with the federal government’s.
To the surprise of many in the basement room of the Minnesota Capitol that day three years ago, I was not there to ask the legislators to reduce taxes on the owners of the small businesses I represeent. Rather, I hoped to persuade them not to adopt the provisions that Congress had just passed in the Tax Cuts and Jobs Act, known as TCJA, into Minnesota’s own tax code. The ink on the TCJA was barely dry when business lobbyists began pressuring the Minnesota Legislature to match those tax cuts, aligning our tax law with the increasingly regressive federal government’s.
Fast forward three years and here we are again, and the tax committees of the Minnesota Legislature are faced with another tax conformity bill, this time determining whether businesses that took Paycheck Protection Program loans should have to pay Minnesota taxes on that money, even though it’s exempt from federal taxes. The small businesses this time around are far fewer in number and far more in need, continuing to deal with the overwhelming economic crisis that has been borne so heavily by Minnesota main street businesses for the past twelve months.
Many of those businesses only made it by availing themselves of the federal government’s Paycheck Protection Program, a federal loan program in which the borrowing is forgiven by the government if the expenses meet certain qualifications. And, by and large businesses took those loans because they knew that the continued survival of the communities where they live and work would require them to do that. Absent the government providing Americans the money to get by, these businesses took the opportunity to continue providing living wages to their employees using PPP loans.
The previous sentence is important, because many seem to forget that the federal government could have simply sent larger direct checks to all Americans, but instead forced the money to be doled out through the complicated PPP application process. The loan process changed repeatedly, the application process was onerous, and business owners had to trust the loans would be forgiven if used for payroll and a few other approved expenses. All at a time when the last thing any business owner needed — many were completely shut down to stop the spread of this deadly virus — was to take on additional debt. But they did, because they knew their communities and their employees were counting on them, and because the government had asked them to step up and handle the distribution of these funds.
There were mistakes in the initial rollout, and Congress did what it could in most cases to address them, including making it clear that they did not intend to tax the funds that business owners had immediately paid out to employees. And also did not intend for the payroll expenses associated with those funds to be excluded from tax deductions (as all typical payroll expenses are under both IRS and state revenue laws). This made sense because they were emergency loans. They made the difference for so many businesses between staying open and closing for good — the difference for so many workers between making it through 2020 or not. So, of course these businesses shouldn’t then have to pay tax on the emergency loans or be prohibited from deducting those expenses in the ordinary course of business.
And this issue is what Minnesota legislators are now grappling with.
Likely in the same room or its virtual equivalent to the one I testified in three long years ago.
And oddly, the words I used to explain to them why businesses didn’t need tax conformity back then also offer an explanation of why we desperately do need the conformity provisions of SF263 and HF501 to pass. Here’s some of what I said three years ago:
“[Small business owners] pay tax on all of their income at the personal level, and in Minnesota, the median income for those individuals who owned pass-through businesses is about $50,000.
Folks who make $50,000 are generally one catastrophe away from needing any of the social services the great state of Minnesota has historically been able to provide and which are funded by our tax base. Folks who make $50,000 are not worried about whether the estate tax exemption in Minnesota will be raised from $3 million, but are worried about whether there will be enough money to fund MinnesotaCare or heating assistance if their business suffers a down month. Folks who make $50,000 are counting on you to realize that the highest-income residents of Minnesota got a gift from the federal government in many ways [in the TCJA], … and they certainly don’t need a matching one from this Legislature, especially considering that particular federal change is projected to cost the state $592 million dollars in revenue.
Small business owners are far more interested in funding for health care, child care, education and infrastructure rather than additional tax cuts.”
And those words are still true. Small business owners are far more interested in funding for health care, childcare, education and infrastructure — but they’re also interested in surviving. They are also interested in Minnesota legislators realizing that last year was the worst economic situation many of us will ever see, and it is not appropriate to attempt to balance the 2021 (or 2022, or 2023) budget by trying to take a cut from rescue funds that have already been spent in accordance with complicated federal rules. Remember that for many of the business owners, they sent the money out the door as soon as they got it. Indeed, they had to to get the loan forgiven! Yes, it will cost the state some money, but helping these struggling businesses is well worth it.
In 2017 the small business owners of Minnesota I represent told this Legislature to put the money from a potential tax cut — all $592 million of it — back into the safety nets of this state so they’d be there when folks needed them. In 2020 and 2021, small business folks need them. It’s time to spend the money we saved back then and pass full PPP conformity in the Minnesota Legislature by passing SF263 and HF501.
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