To note: February 18, 2021, The Evers government has signed a bill (AB 2) which, among other provisions, brings the state into line with the federal tax treatment of canceled PPP loans, providing an important solution to the problem described below.
Nearly 90,000 Wisconsin small businesses that have taken out loans under the federal government Paycheque Protection Program (PPP) will face hundreds of millions of dollars in state income tax on these loans this spring, although the loans are tax exempt federally. Unless lawmakers take action, businesses that have received PPP loans and related federal assistance will be $ 457 million in state taxes until 2024 – with more than half of those taxes coming due this spring – although Wisconsin is on track to see continued growth in general fund income even in the middle of the pandemic.
Under current Wisconsin law, first-round PPP loans (those issued in 2020) will not be treated as taxable income, but the expenses paid for the use of these loans will be. not eligible for the usual deduction of expenses. This means that Wisconsin companies that have taken out PPP loans will have a higher Wisconsin level. taxable income that if they had not used the federal lifeline. Second-round PPP loans (those issued in 2021) are also in the process of being taxed by the state, albeit in the opposite direction: expenses will be deductible, but the loans will be treated as taxable income.
This complex and time-consuming processing exists because of the odd way the Wisconsin tax code currently sits against the federal tax code. In general, Wisconsin complies with the Internal Revenue Code (IRC) as it existed as of December 31, 2017, according to which canceled loans are generally treated as taxable income and normal business expenses (such as payroll, rent and utilities) are, of course, deductible. . That is why, in the absence of legislative action, Wisconsin remains poised to treat second-round PPP loans as taxable income, but allows the deduction of associated expenses.
While Wisconsin most consistent with an outdated version of the IRC, lawmakers have selectively enacted some recent federal tax changes, including the CARES Law provision clarifying that first-round PPP loans will not be treated as taxable income. Although lawmakers and Gov. Tony Evers (D) came to an agreement last April, with the enactment of AB 1038—To exclude amounts of PPP loans forgiven from taxable income, a note released last week by the Wisconsin Department of Revenue signals the state’s plans to deny the expense deduction. Denying P3-covered expenses from the usual expense deduction would have a similar effect to taxing canceled loans as income in the first place, an outcome that policymakers in Wisconsin have previously sought to avoid.
Interestingly, the US Congress has run into the same problems. When choosing, in the CARES Act, to exclude forgiven loans from income, the Treasury Department concluded that, on its interpretation of the existing law, to exclude forgiven PPP loans from taxable income. trigger the denial of the deduction for business expenses—A ruling that made the tax-exempt treatment of the CARES Act for canceled PPP loans essentially meaningless. Congress solved this problem with the promulgation of the Consolidated Appropriation Act in December – change the law to ensure that expenses covered are deductible. But Wisconsin, by following outdated federal language, is on track to deny the expense deduction, with the state revenue department relying on the now overturned Treasury decision as a precise interpretation of the law. as it existed before, in a version that Wisconsin still complies with. By complying specifically only with the original CARES provision for canceled loans, and not the current IRC as a whole, or the broader provisions of the two federal bills, the goal of Wisconsin lawmakers in amending the tax treatment of income from PPP loans has been thwarted.
The good news is that it is not too late for state policymakers to act to accept the technical correction passed by Congress, because some Wisconsin lawmakers have proposed. That would save Wisconsin PPP recipients—Including restaurants, bars, dairy farmers, and salons — having to pay hundreds of millions of dollars in unforeseen taxes on this tax day. Failure to act would force Wisconsin’s roughly 90,000 P3 loan recipients to scramble for money to pay surprise tax bills on federal aid that was never meant to be taxed.
Wisconsin policy makers should provide certainty to these employers now and avoid adding to the immense financial and administrative burdens that countless business owners and their employees are already facing in the midst of the crisis. pandemic. The increase in tax liability would now lead more harmful small businesses to closure, leading to more job losses – the very outcome that the PPP was designed to avoid in the first place.
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