Taxing You for the Government-Mandated Shutdown
To: Mr. Mike Hickey
Minnesota Director, National Federation of Independent Business
380 Jackson St.
St. Paul, Minnesota 55101
Dear Mr. Hickey:
You have alerted your membership, and members of the Minnesota Legislature, that Minnesota is planning to tax all loan forgiveness granted to small businesses under the Payroll Protection Plan (PPP). Let’s review the absurdity of this situation.
On March 16, 2020, the State of Minnesota, by Executive Order 20-04, made it unlawful for many small businesses to remain open. Bars, restaurants, and public venues of all kinds were required, under penalty of law, to shut their doors and cease business as usual. As of July, it would have been unlawful for anyone to walk into a bank without wearing a mask! These have been truly unprecedented times filled with unprecedented challenges, and as with all such events, the catastrophe was unevenly distributed. Much of that damage was piled on the backs of small businesses.
Congress reacted to this unprecedented disaster by enacting the Coronavirus Aid, Relief, and Economic Security (CARES) Act in large part to save our economy, and particularly small businesses. The Paycheck Protection Program (PPP) was a major part of this legislation. It was always part of the legislative intent of the CARES Act that these loans would be forgiven and that the forgiveness would not be taxed, yet business expenses would remain tax deductible.
The program was a great success. In Minnesota, according to statistics from the Small Business Administration on federalpay.org, more than 100,000 small businesses (average size 11 employees) took out loans in excess of $11.3 billion to stay open (Editor’s Note: TCB’s parent company MSP Communications received a PPP loan). As one small business executive told the undersigned, without the PPP loan, “we would not be here today”.
But a funny thing happened on the way to the recovery.
The IRS issued regulations indicating that any PPP loan forgiven would be treated as taxable income. Congress again reacted to this crisis by amending the CARES Act with the passage of the Consolidated Appropriations Act, signed into law on Dec. 27, 2020. This law made it clear that business deductions shall not be denied, and that loan proceeds are tax deductible for federal income tax purposes. This enactment was so popular that both Ilhan Omar and Tom Emmer voted in favor (as did the entire Minnesota congressional delegation). So, while it was clear on Dec. 27 that the federally guaranteed PPP program would not be taxable, a more larcenous impulse is running through the Minnesota Department of Revenue.
Minnesota has already greatly benefited from the PPP program in reduced unemployment benefits and social service payments, while avoiding even more dire economic collapse.
Unlike Wisconsin, Iowa, California, Ohio, Illinois, New York, New Jersey, and a number of other states, and the District of Columbia, Minnesota’s current plan is to tax all recipients of PPP loans (with exceptions such as nonprofits, which don’t pay state taxes). Keep in mind that Minnesota’s maximum marginal corporate income tax rate is already the third highest in the United States, at 9.8 percent. Minnesota government provides many services, one of which apparently includes determining a person’s “fair share” of taxation. Efforts to increase taxation are usually preceded by the phrase “pay your fair share.” But no matter how you define fairness in this context, forcing a company to close and then taxing money specifically authorized to rescue employment (and intended to be tax-free) can be nobody’s definition of “fair.”
Proponents of this “unfair share” will argue that the state’s projected $52 billion budget needs the estimated $438 million that will be generated by taxing PPP loan forgiveness. Minnesota has already greatly benefited from the PPP program in reduced unemployment benefits and social service payments, while avoiding even more dire economic collapse. Businesses that prosper and continue to prosper in the future do pay increased taxes—and not just income taxes, but property and sales tax as well. But there’s another problem posed by taxing PPP loan forgiveness—the “hole in the budget” problem.
Taxing our small businesses for PPP loan forgiveness is a one-shot budget enhancement.
The difficulty with one-shot revenue windfalls is exactly that—they do not reoccur. However, the programs paid for do reoccur. Consequently, every year thereafter, there will be an additional “hole in the budget” that will need to be filled in some manner. It was one of Gov. Mark Dayton’s most impressive budget reforms that this state finally got away from artificially balancing our state budget by delaying payment to school districts until the first day of the next biennium. There are state programs that should be well-funded, and they should be funded by reasonable and reliable revenue streams, not by budget gimmicks. Taxing PPP loan forgiveness is an unfair gimmick.
Minnesota government forced many companies to close and now wants to tax them on the funds expressly authorized on the premise that they would not be taxed. That is not anybody’s “fair share.”
Contact your state representative and state senator and urge them to vote against this unfairness. And good luck with your amended and complicated tax returns.
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Yours in the fight,
Vance K. Opperman
All for moving on
Vance K. Opperman (firstname.lastname@example.org) is owner and CEO of MSP Communications, which publishes Twin Cities Business.