I wanted to discuss a tax cut package that's going through the Assembly and likely will be signed into law soon, because there's one part that will allow a major tax break for businesses that has been deceptively described by the Wisconsin Manufacturers and Commerce crowd.
It was part of a list of tax measures intended to match up state tax code with the federal one, which on the surface seems like a good plan, because it makes it easier for people to file taxes if they don't have to change many numbers between the state and federal forms. This particular provision changed the taxes of a business that received assistance through a PPP loan or similar Fed program, and WMC claimed that the failure to match state law to the Feds would result in a surprise tax hike when those business owners file taxes in the coming months.
It’s worth mentioning that the amount of PPP loans a company had received had already been allowed to be written off this Spring, both at the federal and state levels, in conjunction to the CARES Act and the state’s related follow-up bill that passed in April. Then,
the Feds put this provision in the stimulus/budget bill that passed in December, after complaints by businesses about still having to pay taxes on other expenses in 2020.
Finally, the relief package answers a burning question on the minds of borrowers: Yes, business owners can claim deductions for expenses covered by PPP loan proceeds.
Appearing on CNBC’s “Squawk on the Street” Monday morning, Treasury Secretary Steven Mnuchin confirmed that Congress agreed to permit tax deductibility on those expenses.
The issue has been a contentious one. Forgiveness of the PPP loan is tax-free, but the Treasury and IRS have said that covered expenses aren’t deductible.
Allowing the deduction would create a double tax benefit, the agencies previously said. Treasury and the IRS said last month that business owners who “reasonably believe” their PPP loans will be forgiven can’t deduct the costs.
Nice to have that bit of help in the right places, eh?
What was brought up by Dems in the Assembly today was that there no restrictions on the level of income that a PPP-receiving business could have, or the amount of expenses they could write off. This means that a company could still take the “double deduction” even if it ended up being an overwhelmingly profitable business in 2020.
The other problem that Dems had with the tax cut is that the provision is not refundable. Which means that you have to be in position to earn a profit before the PPP-paid expenses are written off. As you’d imagine, a lot of businesses are taking a loss in 2020, even after taking into account the PPP loans they may have received. This means they can’t write off a thing under this “double deduction” until a future year, when they might be profitable.
This is why
the Legislative Fiscal Bureau notes that this tax cut will be used by businesses beyond this tax season, and would take a bite out of the 2021-23 budget that Governor Evers is going to produce tonight.
And it may not end in 2023, depending on how long those losses are carried over. And could this tax break be continued with
PPP version 2.0, which was also part of that December bill, and won't have any of the funds go out until 2021 (and wouldn't be written off until 2021 taxes are filed in early 2022).
That being said, it was only this provision that drew opposition out of a large number of tax changes that were passed today to align with the Feds' moves. And it's worth noting that the full bill still passed the Assembly by 90-6 and the Senate 27-5. I also wouldn't expect (or recommend) that Governor Evers veto the bill, because there are many needed items such as an expansion of the state's Earned Income Tax Credit that allows for income in 2019 or 2020 to be used, and gives another $30 million of assistance to lower-income Wisconsinites.
But let's not kid ourselves. For a lot of profitable businesses that may have taken a PPP loan when the effects of the COVID World were unknown, are now looking at yet another windfall, with funds that could likely be used for many other circumstances that may give more bang for the buck. I just hope Governor Evers takes this into account as budget talks develop over these coming months, and reminds WisGOPs that many businesses just got an extra bailout with the adoption of this questionable Federal provision.
On a more positive note, it looks like the Legislature added a provision that also allows recipients of state-based programs such as the All In program to write off the state grants that were funded through CARES.
ReplyDeleteThose state grants were more targeted than PPP loans, and were more likely to go to hard-hit industries like restaurants and live music venues, although in much smaller amounts than the PPP loans. So that's a good development.