Wisconsin small business owners may have to pay state taxes on P3 loans

Without action from state lawmakers and Democratic Governor Tony Evers, many small businesses in Wisconsin could have to pay unexpected state taxes on loans taken out under the Federal Paycheck Protection (PPP) program.

The news comes less than a month after Congress created a legislative solution to the same problem at the federal level, ensuring that businesses would not have to pay additional federal taxes on their P3 loans. These changes came in the latest round of coronavirus relief that was enacted in late December.

The PPP, originally established in March as part of the first round of federal coronavirus aid, provided loans to small businesses to help cover the cost of payroll, in addition to expenses such as rent, l mortgage insurance and utilities. In general, if a business was able to maintain its workforce, the loans were repayable.

According to interviews with several PPP recipients, many felt that if they followed the rules of the program, the loans would essentially turn into government grants to their businesses at no cost to them.

But first in May and again in November, the IRS said expenses paid with P3 loans that were or would be waived could not be deducted for federal tax purposes. This decision would have increase the taxable income of a business, resulting in thousands, tens of thousands, and in some cases even hundreds of thousands of dollars in taxes for small business owners that they would not have had to pay had they not covered these expenses with PPP funds.

In the second round of federal coronavirus relief passed in late December, Congress included legislation to address the problem and allow businesses to make these deductions for their federal taxes.

But in a notice posted on its website on Friday, the State Revenue Department clarified that Wisconsin law adheres to previous PPP restrictions, which means small businesses will not be able to deduct these expenses from their state taxes.

This means that small businesses, many of which are under immense financial pressure amid the economic downturn from COVID-19, could have to pay state taxes on their PPP loans unless the state legislature and Evers do not. ‘intervene.

Terry Hoover, partner of the Appleton offices of the accounting and consulting firm Wipfli, said the cost to businesses will vary depending on the size of their PPP loan and how the business is organized. For a sole proprietor, for example, Hoover estimates that businesses could face an additional $ 6,000 to $ 8,000 for every $ 100,000 of expenses that a business is unable to deduct.

If no legislative action is taken by April 15, many companies will have to start paying state taxes on their PPP loans, according to Hoover. But he added that some companies have already been affected by the confusion, including at least seven companies at Wipfli alone.

“So now they are waking up to find out Friday morning that they actually underpaid their taxes in Wisconsin, and therefore have to change those returns and pay more, plus 12% interest,” Hoover said. “Or they can wait and hope that the legislature acts retroactively (to bring Wisconsin into line with federal law) to avoid having to do it.”

The Wisconsin Department of Revenue also said Friday that under current state law, businesses with a second PPP loan must treat that loan as taxable income if it is canceled. This would have a similar effect on small business taxes in 2021, forcing small businesses to pay taxes on the government loan.

Dan Glomski, director and head of business valuation at accounting firm SVA in Milwaukee, said throughout Congress, PPP loans were to be a tax-free lifeline for small businesses affected by the pandemic. Glomski said state lawmakers and Evers should respect Congress’ intent, instead of treating P3 loans as a “revenue-generating opportunity.”

Lawmakers have yet to introduce legislation that would reconcile the differences between state and federal laws on P3 tax matters.

A representative of Representative John Macco, chairman of the Assembly’s Ways and Means Committee, said Tuesday that Macco and his colleagues on the committee were “aware of the inconsistencies” between federal and state laws on P3-related tax matters. and “examine them”. . ”

A representative from Evers did not respond to questions about whether Evers would support legislation that would prevent small businesses from having to pay taxes on their canceled PPP loans.