Employees work at JIT Powder Coating in Farmington, Minnesota. The homeowner is dealing with an unforeseen problem with his PPP loan.
FARMINGTON, Minnesota. (FOX 9) – Tim Milner saw federal money as a godsend last spring.
Milner, owner of JIT Powder Coating in Farmington, obtained a forgivable $ 500,000 loan through the federal Paycheck Protection Program last spring, when his sales plunged during the pandemic-fueled recession.
Distressed businesses were rescued with PPP loans facing state money taxes
Small businesses that received PPP loans to survive the COVID-19 pandemic are now surprised to learn that they will face state taxes on money.
Milner used it to keep all 65 of his workers on the payroll and was not required to refund the money under the program. Even so, he and other Minnesota business owners are being hit by tax surprises, because state taxes on loans are forgivable.
“When I sat down with my accountants in mid-December and they told me that the $ 500,000 would be taxed at 9.8 percent, I was shocked. Absolutely shocked,” said Milner in an interview at his store.
The Pay Check Protection Program, passed by Congress as part of the March 2020 stimulus law to slow the rise in the unemployment rate, channeled $ 11.3 billion to 102,352 Minnesota companies last year.
Business owners did not have to return the money if they used it mainly to pay their workers. The program was promoted federally as tax exempt.
But Minnesota’s tax law was not created to automatically conform to federal law, as some 20 states do. Instead, lawmakers would have to make the change.
That’s why Milner’s forgivable loan is subject to the state’s corporate income tax, leaving him with a $ 50,000 payment due next month.
“We spent every last dollar for that purpose (employee payroll),” Milner said in an interview. “So the money’s gone. Now, you have to get $ 50,000 out of nowhere.”
Minnesota is the last state in the region to tax PPP loans as revenue. Wisconsin changed its law this week, providing tax breaks for tens of thousands of businesses. Iowa and North Dakota are in compliance with federal law, while South Dakota does not tax income.
The chairmen of the House and Senate tax commissions have said in interviews that they support changes, although the bills continue to await a vote on their commissions.
Making PPP loans tax free will cost $ 438 million over the next two years, analysts at the state Revenue Department estimate this week.
“I think everyone is realizing that the $ 438 million will be very difficult to make, so it will have to be targeted,” said House Taxes President Paul Marquart of DFL-Dilworth. “I think we have to find a way to reach those who have been hit hardest.”
State Senator Carla Nelson, chairman of the Senate Tax Commission, said her goal was to bring a tax compliance bill up for a vote in the Senate soon.
“The federal government will not tax PPP loans forgiven as revenue and neither should the state of Minnesota,” said Nelson, R-Rochester.
In Minnesota, corporations are taxed at a fixed rate of 9.8%. Most companies are taxed according to individual income tax rates, which vary from 5.35% to 9.85%.
The issue of tax compliance is a priority for business groups, including the Minnesota Chamber of Commerce.
“This is definitely the obstacle for the Legislature, the cost of revenue ($ 438 million),” said Beth Kadoun, the Chamber’s vice president for tax policy. “But we do not believe that the state should benefit from the small companies that have taken out this loan.”
Late last year, Congress approved a second round of PPP loans, under which 45,443 Minnesota companies were approved for an additional $ 2.9 billion. This time, companies had to meet an income loss threshold to qualify.
Milner, who received a second round of PPP financing, said he plans to use part of the new loan to pay the Minnesota taxes he owes in the first round.
“This is the most ridiculous situation you could be in,” he said, “taking more money from the federal government, not to give to the people, but to give to the state.”