Forgiveable PPP business loans will be taxed by Minnesota

More than 93,000 Minnesota businesses took federal forgivable Paycheck Protection Program loans valued at approximately $11 billion.

Stock photo / Unsplash

(The Center Square) – Minnesota businesses can accept their forgiven pandemic loans without worrying about paying federal taxes, but the state taxman is a different story.

More than 93,000 Minnesota businesses took federal forgivable Paycheck Protection Program loans valued at approximately $11 billion.

After the Internal Revenue Service decided the forgiven loans were taxable, Congress passed legislation in December exempting them from federal taxes.

In Jan. 2021 alone, nearly 28,000 businesses accepted $1.8 billion to keep them afloat.

Under current state law, those businesses could face tax bills on forgiven loans since the money is considered business income.

Ryan Brown, senior media specialist at the Department of Revenue, explained that Minnesota doesn’t have rolling conformity with the Internal Revenue Code (IRC).

“Regarding the taxability of PPP loans, Minnesota has not adopted the federal law changes enacted after December 31, 2018, that affect federal adjusted gross income for tax year 2020,” Brown wrote. “Taxpayers will make an adjustment on the appropriate Minnesota nonconformity schedule to report Paycheck Protection Program funds as income.”

Morgan Scarboro, manager of tax policy and economist with Virginia-based government relations firm Multistate, explained: “The baseline is that rolling conformity states will follow the IRC — forgiven PPP loans are not taxable, and expenses associated with the forgiven loan are deductible — unless the state legislature acts to decouple.

“For static conformity states, it is the opposite — forgiven PPP loans are taxable, or the expenses associated with the forgiven loan are nondeductible, or potentially both — unless the state acts to adopt the current IRC (and does not decouple from those specific sections in the process). However, additional analysis is required on a state by state basis as each state has slight differences in exactly how they couple to the IRC.”

Since the state’s corporate tax rate is 9.8%, it could leave businesses with a five-figure bill.

But money’s tight in Minnesota.

The state faces a projected $1.3 billion deficit, and although it has a $2.4 billion rainy day fund, not taxing those federal loans would cost $411 million in fiscal year 2022, according to the state revenue office.

Senate Bill 263, sponsored by Cook County Independent Thomas Bakk, aims to ensure PPP loans can’t be taxed and can be deducted from business expenses.

Mike Hickey, Minnesota state director for the National Federation of Independent Businesses, said it’s “essential” the state doesn’t tax PPP loans.

“You shouldn’t be taxing an entity that you sent a life-saving loan,” Hickey said. “We sent a lifeline to small businesses, who by no fault of their own due to all kind of pandemic restrictions,” had their businesses shut down or restricted.