PPP loans and Minnesota taxes

The Senate Tax Committee considered a bill this week to address the differences between how the federal government and the state of Minnesota tax Paycheck Protection Program (PPP) loans received by some businesses in 2020.

The PPP loans were authorized in the federal CARES Act passed in March 2020 with the understanding they would be forgiven if used on allowable expenses, which included employee wages, rent, utilities, and other business-related expenses. Under typical circumstances, forgiven debts are required to be included in a taxpayer’s income for that year for both federal and state tax purposes, and any business expenses paid for with non-exempt income would be tax-deductible. However, Congress specifically exempted the forgiven loans from gross income for federal tax purposes and allowed the business expenses supported with the tax-exempt PPP loans to be deductible.

Authorizing a double-tax benefit is a big deviation from standard practice, but Congress was attempting to recognize the difficult situation many businesses are facing during the pandemic. Now, Minnesota lawmakers must decide whether to conform to the federal law. The bill heard this week proposes to do so, but at a cost of $438 million.

The bill’s supporters include many businesses that received the PPP loans. Committee members pointed out, however, that hundreds of Minnesota businesses applied for PPP loans but did not receive one, and they questioned whether spending nearly a half-billion dollars on a tax benefit for some businesses that already received support is the proper use of state funds – especially with a $1.3 billion deficit on the horizon.

There was bipartisan realization that the state must wait for the February forecast before moving on such an expensive proposal, making it unlikely this would pass before the April 15 tax-filing deadline. If Minnesota changes nothing about its tax law, loan recipients would have to include loan amounts in their income for state tax purposes, but they still would be allowed to deduct the business expenses the loans supported. That is most likely a revenue-neutral option. If the legislature makes a different decision after April 15, businesses could file an amended return.

The bill was laid over for possible inclusion in an omnibus bill. (SF 263)