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Tim Milner, owner of JIT Powder Coating of Farmington, survived 2020 thanks in no small part to a $550,000 loan from the federal government's Paycheck Protection Program (PPP) that was forgiven because he used the money to keep people employed as the pandemic sent the country into recession.
He used the money to pay 60 full-time employees, including seven summer workers, for 18 weeks.
"Every dollar forgiven was documented with a payroll expense," said Milner, who founded the business in 1993. "Now I learn that Minnesota plans to tax my PPP loan as income, at the rate of 9.8%."
Thousands of Minnesota businesses that took "forgivable" federal loans of $100,000 to $10 million last year are facing tax bills on what Minnesota law considers income.
That is, unless the Minnesota Legislature decides to match the decision by Congress in December to make the assistance tax-free. It's a process known as "conformity" that state lawmakers face when federal tax rules change.
The Minnesota House and Senate will consider the matter, which has an estimated price tag to the state of $438 million, by April. Hearings were held this month by the respective tax committees.
The PPP loans were authorized by Congress and President Donald Trump last spring with the understanding they would be forgiven if used on allowable expenses, including wages, rent and utilities.
Typically, forgiven debts are required to be included in a taxpayer's income for that year for both federal and state tax purposes. However in December, Congress, under pressure from small businesses, also exempted the forgiven loans from gross income for federal tax purposes. In doing so, Congress went against Trump's Treasury Department, which sought to tax the forgiven loans.
"Congress told Treasury that, with its act, it was overriding their guidance, so PPP forgiveness of a loan is not income and the expenses that the loan covered were still deductible from 2020 taxes," said Adam Goehring, a partner at the Baker Tilly accounting firm. "Full, tax-free treatment on PPP forgiveness.
"Business recipients [in Minnesota] need clarity one way or the other so they can plan for related tax payments, or have that money fully tax free for federal and state tax purposes."
States surrounding Minnesota have already conformed to the federal exemption.
Rep. Paul Marquart, a Democrat from Dilworth and chairman of the House Tax Committee, predicted last week that Minnesota law will also conform. However, Democrats in the House want to wait a few weeks to see the results of congressional debate on yet more federal aid.
"We laid the bill over and we'll see how the finances look," Marquart said. "If we can't do the full $438 million, we'll have to target those businesses that need it most. The leisure and hospitality industry would be most in need. But we're not going to cut education or nursing homes or local government aid."
The $438 million is less than 1% of the anticipated fiscal 2022-23 budget that starts in June. But there's lots of competition for state funds from myriad stakeholders.
The news Friday that the state's 2022-23 budget projection has now swung to a $1.6 billion surplus from the $1.3 billion deficit seen in November will increase the pressure for conformity over PPP-loan treatment.
However, there may be some legislative concern that many businesses that took advantage of the loans-turned-grants assistance didn't need the money. Many Main Street small proprietors would have been put out of business by COVID-related shutdowns last year. There also were car dealerships, chain restaurants, law firms, country clubs and even churches whose need for a government handout seems questionable.
Democrats may try to restrict which Minnesota businesses qualify for full tax deductibility of PPP loan expenses, and the debate could easily go into April at the Legislature.
That means many business owners will have to file in March for several-month extensions on their tax returns.
Milner's manufacturing business, with revenue of $6 million a year, is growing again but it's far shy of its output of two years ago. He said he doesn't have the cash to pay anticipated state taxes.
"I used all that [$550,000] loan to pay people and I submitted the payroll records and it was forgiven," Milner said. "Now the accountants tell me that I will have about $53,000 of tax due to the state government. In normal times, the loan forgiveness is a windfall. The Legislature wants some money from the windfall. But there was no windfall."
Milner qualified for a second Small Business Administration PPP loan this year of about $400,000.
"And I will have to use some of that loan to pay any state tax bill," Milner said. "The cash flow in the business isn't strong enough yet. We're still recovering. We're not dying on the vine. But to say we are healthy with cash reserves, we're not in that situation."
He added, "We hope we'll be back in 2023 to where we were in 2019."
Neal St. Anthony • 612-673-7144
