Businesses Face Minnesota Tax on PPP Loans

FARMINGTON, Minnesota (FOX 9) – Tim Milner saw federal money as a godsend last spring.

Milner, who owns JIT Powder Coating in Farmington, secured a $ 500,000 forgiveness loan through the federal paycheck protection program last spring, as sales plummeted during the pandemic-fueled recession.

Milner used it to keep his 65 employees on the payroll and was not obligated to return the money under the terms of the program. Yet he and other Minnesota business owners are now hit with surprise tax bills as the state taxes forgivable loans.

“When I sat down with my accountants in mid-December, and they told me the $ 500,000 was going to be taxed at 9.8 percent, I was stunned. Absolutely stunned,” said Milner in an interview in his store.

The paycheck protection program, approved by Congress as part of the March 2020 stimulus bill to slow a soaring unemployment rate, funneled $ 11.3 billion to 102,352 Minnesota businesses in the year last.

Business owners did not need to repay the money if they used it primarily to pay their workers. The program has been promoted as tax free at the federal level.

But Minnesota’s tax law is not designed to automatically comply with federal law, as approximately 20 states do. Instead, lawmakers should make the change.

That’s why Milner’s forgivable loan is subject to the state’s corporate income tax, leaving him with a payment of $ 50,000 due next month.

“We spent every dollar on this (employee payroll),” Milner said in an interview. “So the money is gone. So now you have to find $ 50,000 out of nowhere.”

Minnesota is the latest state in the region to tax P3 loans as income. Wisconsin changed its law this week, offering tax relief to tens of thousands of businesses. Iowa and North Dakota comply with federal law, while South Dakota does not tax income.

The chairmen of the House and Senate tax committees have said in interviews that they support the changes, although the bills remain pending a vote in their committees.

Making PPP loans tax-exempt will cost $ 438 million over the next two years, analysts from the state revenue department estimated this week.

“I think everyone realizes that the $ 438 million is going to be very difficult to make, so it’s going to have to be targeted,” said House Taxes chairman Paul Marquart, DFL-Dilworth. “I think we have to find a way to target those who have been hit the hardest.”

State Senator Carla Nelson, Speaker of the Senate on Taxation, said her goal is to bring a tax compliance bill to the Senate for a vote in the near future.

“The federal government will not impose a tax rebate on P3 loans as income, nor will the state of Minnesota,” said Nelson, R-Rochester.

In Minnesota, corporations are taxed at a fixed rate of 9.8%. Most businesses are taxed at the personal income tax rate, which ranges from 5.35% to 9.85%.

The issue of tax compliance is a top priority for business groups, including the Minnesota Chamber of Commerce.

“This is definitely the obstacle to the Legislature, the cost of revenue ($ 438 million),” said Beth Kadoun, House vice president for tax policy. “But we don’t think the state should benefit at the expense of the small businesses that took 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 a revenue loss threshold to qualify.

Milner, who received a second round of PPP funding, said he plans to use some of the new loan to pay Minnesota taxes he owed in the first round.

“This is just about the most ridiculous situation you could be in,” he said, “taking more money from the federal government, not to give it to the people, but to give it to the State ”.