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A month ago, Congress changed the law on the taxation of funds in connection with the Paycheck Protection Plan. The federal program was passed at the start of the pandemic to provide companies with funds to keep their payroll running when revenues declined due to the coronavirus and related public health restrictions.
Now there is pressure on state officials – namely, Governor Janet Mills – to bring Maine tax policies into line with federal regulations known as tax compliance. The federal government is now exempting forgivable PPP funds from federal income tax and allowing companies to deduct the costs covered by the PPP funds. This allows companies to subtract their PPP loan amount from both the income side of the general ledger and the expense side of the general ledger.
Mills has referred to this as a "double tax benefit".
Earlier this week, Mills proposed a partial tax compliance plan that includes the business forgivable loans as taxable income, but allows companies to deduct PPP-related expenses from their state income taxes. After pressure from business officials and Republicans for full compliance with federal tax law, Mills quickly changed course, directing State Department heads to seek federal funding to cover the estimated $ 100 million in lost tax revenue for full compliance.
This narrow focus is unfortunate as the topic calls for a more in-depth discussion of government funding priorities, tax equity and the most effective ways to support small businesses.
Since the state, unlike the federal government, has to have a balanced budget, if it adheres to the federal tax policy for PPP funds, it must compensate for the lost revenue by either reducing expenditure or increasing revenue elsewhere – or by putting less money in the federal government's reserve account. Is foregoing an estimated $ 100 million in income tax revenue the state's top budget priority? Should government spending be cut to extend this tax break? Should less money be poured into the state's rainy day fund during a pandemic and used instead to achieve broader tax compliance?
Will exempting PPP funds from state taxation and allowing appropriate tax deductions help the businesses that have been hardest hit by the pandemic? Does it contradict taxpayers who have received federal aid in the form of unemployment benefits but not companies who have received financial support? Unemployment benefits, which directly help workers who lost their jobs during the pandemic, are taxed at both the federal and state levels. The checks sent to qualified individuals and families as part of two auxiliary bills in the past year are not taxable.
The PPP, advocated by Senator Susan Collins, was swiftly passed in March under the Coronavirus Aid, Relief and Economic Security Act to help businesses facing significant lost revenue due to the coronavirus pandemic and restrictions in place, to slow the spread of COVID-19. The funds should help replace lost income so companies can stay open and meet their payroll, putting money in the pockets of workers who then spend the money, preventing a worse economic downturn. If the federal loan money were used primarily for payroll, the entire loan amount could be taken out, essentially converting the money into a grant.
Under the CARES Act, PPP funds that were approved for forgiveness were not subject to federal income tax. However, expenses related to keeping employees working, such as rent and utilities, could not be deducted from federal taxes.
The Trump administration supported policies not to allow such deductions until the end of last year. In November, the IRS and Finance Department said, "Because businesses are not taxed on the proceeds of a PPP loan made, the expenses are not deductible."
However, a provision in the $ 908 billion relief bill passed in late December amended the federal tax law to allow these expenses to be deducted when calculating federal taxes. This means businesses could receive tax refunds from the federal government in addition to the PPP funds received.
Proponents of both exempting PPP funds from taxation and allowing withdrawal say this will help get small businesses into trouble. It is not clear that this is the case.
In Maine, more than 28,000 PPP loans totaling more than $ 2.3 billion have been made to businesses, including the Bangor Daily News. The average loan was about $ 80,000. The largest loan recipients, receiving between $ 5 million and $ 10 million apiece, included law firms, accounting firms, medical facilities, and car dealerships. Most had more than 300 employees. With full tax compliance, these large PPP recipients would receive the greatest tax breaks.
Tax compliance is a complex issue that raises questions about financial priorities, fairness and coherence. These questions deserve further scrutiny before the state determines how to deal with the tax treatment of PPP funds.