Momentum is building on Beacon Hill for a measure that could protect thousands of small businesses from getting hit with a state tax on federal funds they received through the Paycheck Protection Program.
Congress decided that forgiven PPP loans would not be subject to federal taxes. Because of a quirk in tax law, the tax amnesty carries through at the state level for businesses structured as corporations. But the state would still tax loans-turned-grants for businesses that are structured as “pass-through entities,” which are taxed via personal income taxes paid by their individual owners.
The Baker administration estimates $150 million in state tax revenue could be at stake, when forgiven loans are added up from the first round of the PPP, which took place last year to help small businesses through the worst of the pandemic closures, and the second PPP round currently underway.
Michael Heffernan, Governor Charlie Baker’s administration and finance secretary, said on Tuesday that the administration supports a “fix” that would extend the state-tax exemption to pass-through entities.
The most likely solution would be tied to an unemployment insurance rate freeze bill that Baker recently filed in the Legislature. That measure has some urgency, because the state plans to issue new unemployment insurance bills to employers within weeks. Other employment issues could also be addressed in this bill, such as emergency paid sick leave or tax credits for people below a certain income range who are getting unemployment benefits.
Much of the PPP assistance could be taxable a year from now, when 2021 taxes are calculated. That’s because the loans would be taxable only when they convert to grants. (Businesses can have PPP loans forgiven if they meet certain criteria.)
But some PPP loans were forgiven in 2020, which makes it a pressing issue for some small businesses this tax season. That’s why the Massachusetts Society of CPAs sent a letter on Feb. 25 to legislative leaders, urging speedy passage of a bill that would exempt forgiven PPP loans from taxes as soon as possible. The MSCPA notes that pass-through entities face a March 15 deadline for 2020 taxes.
Zach Donah, the association’s senior director of advocacy, said that if legislation can’t be passed by that date, state officials should at least make it clear that a change is coming, so affected taxpayers and their accountants can file for extensions.
“The clock is ticking on this,” said Senator Eric Lesser, the lead sponsor of the PPP exemption bill. “Businesses are realizing they’re going to be hit with these tax penalties as they prepare their tax filings.”
Lesser said pass-through entities tend to be smaller businesses, such as restaurants and salons. “What you have is an inherently unfair situation where one classification of a company will automatically receive the benefit while another classification of a company will not,” he said.
Lesser’s bill has attracted nearly 100 cosponsors in recent weeks amid lobbying by business groups.
The Massachusetts Restaurant Association, for example, alerted its members Monday, asking them to e-mail lawmakers and ask for passage of Lesser’s bill. Chief executive Bob Luz said about 1,000 e-mails have gone out so far as a result. The bill just references the first round of PPP, established last spring by the federal CARES Act, but Luz expects legislative leaders will adjust the language to cover the second round, as well.
“I’m hoping reasonable heads will come to a good conclusion here,” Luz said.
The state, like the federal government, typically taxes grant funds. But the administration is not factoring in PPP taxes in its budget for the current fiscal year, or for the one that begins in July. The same is true for state pandemic-assistance grants issued through the Massachusetts Growth Capital Corporation. (The Baker administration expects that program could generate $25 million to $35 million in state taxes, but supports making those grants tax-exempt, as well.)
Lesser’s bill has come under fire by the Massachusetts Budget & Policy Center, a left-leaning think tank that argues the state shouldn’t give up this revenue, because businesses are already able to deduct any PPP-reimbursable expenses from their taxes. MassBudget estimates at least $165 million would be forsaken if the state allows a “double-dip” tax break.
“It’s not a good use of state revenue to provide a second tax break on top of the first,” said Kurt Wise, a senior policy analyst with MassBudget.
Wise noted that the small businesses that needed help the most are those that lost money last year — businesses that shouldn’t owe any taxes as a result.
The next lobbying blitz could come from the Retailers Association of Massachusetts. Jon Hurst, president of the trade group, said he plans to send an alert to his members early next week, seeking their help in persuading the Legislature to pass a PPP tax fix and an unemployment rate freeze this month.
“There was a major hole in the economy that we’re still working to repair,” said Lesser, referring to COVID-related restrictions and revenue losses. “Anything we can be doing to support small businesses right now, we need to do.”