R.I. businesses step up opposition to taxes on forgiven PPP loans

Taxing the pandemic rescue funds would raise about $67m from for-profit businesses, but owners say it would drive companies out of the state and hinder growth

CRANSTON — Rhode Island business owners are escalating their campaign against proposed taxes on pandemic rescue funds that they say could drive companies out of the state and hinder growth as they try to recover.

“Our industry did not ask to be shut down, but we have done our best to keep our heads afloat,” Sarah Bratko, lobbyist for the Rhode Island Hospitality Association, said at an event Monday in Cranston that served as part pep rally, part press conference. “We’re just asking that the state does not penalize us for accepting help when it was offered.”

At issue are proposals that would raise tens of millions of dollars from businesses.

Under one proposal, the state would make forgiven Paycheck Protection Program loans over $150,000 taxable. Gov. Dan McKee included it in the budget he submitted soon after taking office, and although he initially distanced himself from it, he has more recently defended it as fair.

It would raise about $67 million from for-profit businesses that received PPP loans, which were part of the federal government’s first pandemic rescue package last year. About 1 percent of for-profit businesses with PPP loans would be affected by the proposal in the 2020 tax year, although that increases to 15 percent in the 2021 tax year, according to state projections.

State legislative leaders, while not outright embracing it, have implicitly defended the proposal as recently as Monday.

“The issue of taxing PPP will be considered as part of the budget deliberations,” spokesmen for the House and Senate leaders said in a joint statement. “The state tax only applies to a very small number of companies that received forgivable loans over $150,000 and recorded a profit. Those companies that did not record a profit would not be taxed.”

Separately, state legislators have debated raising the top income tax rate on high earners. Unlike the PPP proposal, though, McKee has expressed skepticism about raising income taxes.

On Monday, Rhode Island business owners and some state lawmakers took turns bashing any effort to raise taxes, especially when Rhode Island has a budget surplus of hundreds of millions of dollars over two fiscal years — not to mention more than $1 billion in federal aid.

“Given all this extra revenue, why would we raise income taxes, or any taxes?” Michael DiBiase, the executive director of the nonprofit Rhode Island Public Expenditure Council, asked the crowd, which responded with a smattering of nodding heads.

The federal government and most other states, including Rhode Island’s neighbors, aren’t taxing PPP loans. They’re also allowing taxpayers to deduct expenses that were paid with PPP money. Some progressive groups say that’s unsound tax policy and that the state should use the revenue to invest in things like infrastructure.

More than 100 people, mostly business owners and employees but also Chamber of Commerce types and legislative critics of the tax proposals, came out to the event on Monday at a warehouse site on Plainfield Pike in Cranston. The event was organized by the Rhode Island Business Coalition, a group that’s been around for a few years but recently formalized itself into a business advocacy organization.

Critics of the PPP proposal have issued statements, convened virtual news conferences and testified at legislative hearings. Monday’s event was an escalation in their effort to do away with the tax proposals before the budget passes.

Among the speakers was Karl Wadensten, the owner of VIBCO, a Wyoming, Rhode Island-based company that makes vibrators that are used in various industrial processes. They employ 100 people and received a $1 million PPP loan in the first round.

As he spoke out against the proposal, Wadensten led the group in a chant of, “We love Rhode Island” — love it enough, he said, to help it improve its business climate and not tax it into the ground.

In an interview after, Wadensten said he isn’t yet sure what the tax implications would be for VIBCO. Certainly he would have a harder time growing. He spent his PPP money on his employees, who received bonuses for showing up through a difficult pandemic, he said.

The company is an S-corp, meaning the company’s taxes flow through Wadensten’s own. Like VIBCO, most businesses will have to worry about the taxes when they file next year, because the actual forgiving of the loans took place in 2021. Norm LeBlanc, Wadensten’s CPA, said it could easily be in the high five digits or six digits in taxes owed to Rhode Island.

Even if they didn’t make a profit in a particular year, LeBlanc said, making PPP loans taxable would wipe out some of their losses, which they then wouldn’t be able to carry ahead to future years. Like all things taxes, it’s a little complex, but to LeBlanc it’s pretty simple: This will affect everyone.

“It’s a big domino,” LeBlanc said.