Forgiven PPP Loans Currently Taxable Under Minnesota Law
Federal Paycheck Protection Program (PPP) loans were a lifeline to many small businesses during the pandemic. The loans were set up to be forgivable, effectively becoming grants, if the business met certain conditions about using the money.
But there’s a potentially big bump in the road for businesses in the state. Normally forgiven loans or grants would be considered income and therefore taxable. Changes have been made at the federal level to make forgiven PPP loans non-taxable.
The push is on to bring Minnesota into compliance with federal tax law. There are bills in the Minnesota Senate and Minnesota House of Representatives that would make the change. Business interests are strongly backing the move.
“It’s a pretty big priority,” said Mike Hickey, the state director in Minnesota for the National Federation of Independent Business (NFIB). “You shouldn’t be taxing the business on the loan that was given to try to save them in a pandemic.”
According to statistics from the U.S. Small Business Administration, Minnesota businesses took out 102,340 PPP loans last year totaling $11.27 billion. The average PPP loan in the state was approximately $110,000.
Estimates from the Minnesota Department of Revenue show that taxing forgiven PPP loans would translate into $438 million for the state’s fiscal year 2022-2023 biennium.
Hickey said that the large revenue estimate is likely giving some legislators pause.
“There’s a pretty big price tag on it. We’re urging legislators to act quickly on it,” said Hickey. “Minnesota takes budgeting very seriously. Tax cuts are counted as expenditures under Minnesota law. So, it does have a cost.”
At the federal level, Congress passed the Consolidated Appropriation Act 2021 in December. That included the Tax Relief Act of 2020 with provisions that made forgiven PPP loans non-taxable and allows businesses to deduct expenses paid for with PPP funds.
The Minnesota Chamber of Commerce is also pushing for the state to bring its tax law into compliance with the federal government.
“What we’ve heard from legislators is that it seems like they’re waiting to see the February forecast which will be released on the 26th of this month,” said Beth Kadoun, vice president of fiscal and tax policy for the Minnesota chamber.
The Minnesota Management and Budget office will release the forecast on Friday, Feb. 26. That forecast will be a big consideration as the legislature works to hammer out the state’s budget.
In December, MMB reported a better-than-expected projected surplus of $636 million for the 2020-2021 fiscal year biennium. But the forecast shortfall for the 2022-2023 biennium is nearly $1.3 billion. That projected deficit is likely to be a factor in debate over the PPP tax issue.
For the moment, there are no strong signals that the legislature plans to act quickly.
A late January summary from Senate DFL Media offered this outline:
“There was bipartisan realization that the state must wait for the February forecast before moving on such an expensive proposal, making it unlikely this would pass before the April 15 tax-filing deadline. If Minnesota changes nothing about its tax law, loan recipients would have to include loan amounts in their income for state tax purposes, but they still would be allowed to deduct the business expenses the loans supported. That is most likely a revenue-neutral option. If the legislature makes a different decision after April 15, businesses could file an amended return.”
Kadoun said that it’s routine business for state tax bills to include updates to come into compliance with new federal tax laws. She acknowledges that this is a unique case given the scale of the PPP program. But she noted that other states are taking action.
“Wisconsin just passed the PPP loan conformity this week on a very strong bipartisan vote,” said Kadoun. “It certainly has bipartisan support around the nation that we’re seeing.”
Wisconsin Gov. Tony Evers just signed the bill on Thursday.