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WISCONSIN PPP Loan Recipients Could Face Unexpected Taxes Unless Governor Signs Legislation

By Misha Lee, MHA Wisconsin Lobbyist

Businesses in Wisconsin that received forgivable loans under the federal Paycheck Protection Program (PPP) since the start of the COVID-19 pandemic could face hundreds of millions of dollars in state income tax liability on those loans unless Governor Tony Evers (D) signs legislation (Senate Bill 2) to exempt these loans from state taxes. To the surprise of loan recipients, the DOR issued guidance to tax filers indicating that forgivable PPP loans will be taxable under Wisconsin law even though the loans are not subject to federal taxes.

The Paycheck Protection Program was part of the $2.2 trillion CARES Act passed by Congress in March 2020 to help keep small businesses open during the pandemic. Any PPP loan proceeds used for qualifying costs i.e. payroll, health insurance for paid sick, medical, or family leave, mortgage interest payments, rent and utility payments, and 60% of the loan proceeds are used for payroll costs, the federal government will forgive the loan. While a loan does not generate taxable income, a forgiven loan generally does. Congress took steps to address this issue by clarifying that forgiven PPP loans under the CARES Act are not included in taxable income for federal tax purposes.

However, some states like Wisconsin still consider a forgivable PPP loan as taxable income, that is unless Governor Evers signs legislation recently approved by the Republican controlled legislature that conforms the state tax code to the IRS code when it comes to federal Paycheck Protection Program loans. According to the nation’s leading independent tax policy nonprofit, The Tax Foundation, under the DOR’s current interpretation, first-round PPP loans from 2020 will not be treated as taxable income, but expenses paid for using those loans will be ineligible for the customary expense deduction. The result is that businesses who took out PPP loans will have a higher level of state taxable income than if they had not tapped into the program. To confuse the situation, the Tax Foundation explains that second-round PPP loans from 2021 may also be taxed by the state, but in a opposite manner - expenses will be deductible, but the loans are treated as taxable income right now in Wisconsin. MHA has joined with a broad group of statewide business organizations that have called on Governor Evers to quickly sign into law legislation that was sent to him to address this issue. Businesses throughout Wisconsin who received PPP loans and related federal assistance should not have to face millions of dollars in new state taxes, especially now in the midst of a global pandemic. For most businesses, it’s fair to say that these loans were never anticipated to be taxable either at the federal or state level.

The DOR’s interpretation comes at a time when the state is realizing a significant general fund revenue surplus. The nonpartisan Legislative Fiscal Bureau (LFB) recently estimated a net fund balance in Wisconsin for 2020-21 of nearly $1.77 billion. Because of the healthy financial condition of our state’s general fund balance, the Evers Administration should align the state’s tax code with the federal IRC. Wisconsin should not force more taxes on already struggling small businesses. The businesses who used these loans, some of whom are MHA members, likely saved the state money on government programs and helped stimulate the economy by keeping people employed during the pandemic. Hardware stores throughout the state were deemed essential businesses at the outset of the pandemic and helped keep many people employed during an incredibly challenging economic environment.

The encouraging news is that Wisconsin state lawmakers overwhelmingly approved legislation this week on a bipartisan vote in both the Assembly and Senate to make sure businesses are not hit with these surprise taxes on their PPP loans.

It’s now up to Governor Evers to take swift action and sign the bill into law.

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