Employees work at JIT Powder Coating in Farmington, Minnesota. The owner has an unforeseen problem with his PPP loan.
FARMINGTON, MIN (FOX 9) – Tim Milner saw the federal money as a sale this spring.
Milner, who owns JIT Powder Coating in Farmington, received a $ 500,000 loan from the Federal Paycheck Protection Program last spring, while sales fell during the recession with pandemic.
Struggling businesses save with PPP loans facing state taxes
Small businesses that have received PPP loans to survive the COVID-19 pandemic are now surprised to hear that they are facing taxes on the state.
Milner used it to keep all 65 of his workers on the payroll and did not have to repay the money under the terms of the program. Yet he and other businesses in Minnesota are now surprised by tax bills because the state taxes forgivable loans.
“When I sat down with my accountants in mid-December and they told me that the $ 500,000 amount would be taxed at 9.8 percent, I was stunned. Absolutely stunned,” Milner said in an interview at his store.
The Salary Protection Program, approved by Congress as part of the March 2020 stimulus law to slow down a balloon-free unemployment rate, led $ 11.3 billion to 102,352 businesses in Minnesota last year.
Business owners do not have to repay the money if they used it primarily to pay their workers. The program was promoted as tax-free federally.
But Minnesota tax laws are not set to automatically comply with federal law, as about 20 states do. Instead, legislators will have to make the change.
As a result, Milner’s forgivable loan is subject to the state’s corporate income tax, which will pay him $ 50,000 next month.
“We spent every last dollar for that purpose (employee payment),” Milner said in an interview. “So the money is gone. So you have to get out of nowhere with $ 50,000.”
Minnesota is the last state in the region to tax the PPP loans as income. Wisconsin changed its law this week and provided a tax break to tens of thousands of businesses. Iowa and North Dakota comply with federal law, while South Dakota does not tax revenue.
The chairmen of the House and Senate tax committees have said in interviews that they support change, although bills are still being voted on in their committees.
Making the PPP loans tax-free will cost $ 438 million over the next two years, government revenue department analysts estimated this week.
“I think everyone’s realization of the $ 438 million is going to be very difficult to do, so it’s going to have to be targeted,” said DFL-Dilworth, chairman of the House Tax. “I think we need to find a way to target those who have been hit the hardest.”
State Sen. Carla Nelson, chairwoman of Senate Taxation, said her goal was to get a Senate tax compliance bill passed soon.
“The federal government will not forgive PPP loans as income tax, and neither will the state of Minnesota,” Nelson, R-Rochester, said.
In Minnesota, companies are taxed at a fixed rate of 9.8 percent. Most businesses are taxed under individual income tax rates, ranging from 5.35 percent to 9.85 percent.
The issue of tax compliance is a top priority for business groups, including the Minnesota Chamber of Commerce.
“This is definitely the obstacle for the Legislature, the ($ 438 million) revenue expense,” said Beth Kadoun, the vice president of tax policy. “But we do not believe the state should benefit from small businesses that have taken out this loan.”
Late last year, Congress approved a second round of PPP loans, including 45,443 Minnesota businesses approved for an additional $ 2.9 billion. This time, businesses had to reach a threshold for lost revenue to qualify.
Milner, who received a second round of PPP funding, said he plans to use part of the new loan to pay the Minnesota taxes he owes from the first round.
“This is about the most ridiculous situation you can be in,” he said, “taking more of the federal government’s money, not to give it to the people, but to give it to the state.”