The state shouldn’t tax forgiven PPP loans

Taxing the loans runs counter to Congress' intent

THE LAST YEAR has been devastating on many levels, but many of our small businesses are still standing because of the support from our communities and yes, because of the support of our local, state, and federal governments. In Massachusetts alone, the Paycheck Protection Program (PPP) helped retain countless amounts of jobs and saved thousands of businesses from closing their doors permanently.

When Congress established the PPP, its intent was to help struggling businesses survive a global pandemic and economic fallout and save millions of jobs. By design, these loans are not subject to federal income tax, but there is a debate happening on whether a state tax should be applied. Let me be clear: it should not.

Taxing the forgiven loans as income runs counter to Congress’ intent for the PPP and could serve as a disincentive for businesses to apply for additional relief and/or result in many more businesses closing permanently. When businesses were encouraged to apply for these loans last spring, they did so with the understanding that they would receive true government aid that would be forgiven so long as they met certain criteria. Had they known they would be taxed at the state level, perhaps their business planning at that time would have behooved them to budget for a 5 percent state income tax, but, unfortunately, that is largely not the case.

The PPP was developed to keep employees on the payroll, which has helped buoy state revenues by generating state income tax withholdings and relieved additional pressure on an already burdened unemployment insurance system. When questions arose about the potential of a double benefit (the so-called “double-dip” argument) by allowing expense deductions and not taxing PPP income, Congress not only put out statements standing by the program’s design, but also passed additional legislation to ensure this intended result.

Massachusetts-based corporations are already receiving this relief while pass-through entities (which is the preferred structure for many small businesses) are not because of our failure to sync the state’s tax code with the federal tax code. Good tax policy requires treating taxpayers in a similar way, therefore, relief must be extended to Massachusetts small businesses, and I encourage the Legislature to enact SD.172 as quickly as possible. Those of us in favor of passing the legislation that was filed by Sen. Eric Lesser of Longmeadow, which has over 90 co-sponsors across the political spectrum, are concerned for the well-being of the hundreds of thousands of employees working for these companies that face potential layoffs, should their employers be unable to afford the tax.

Members of the Massachusetts Society of CPAs and practitioners across the state saw first-hand how important the PPP loans were for their clients. Conversely, they are also attuned to the significant negative impact this 5 percent tax on the forgiven income will have on their clients, many of whom are still struggling to keep their doors open.

Take, for instance, one member with a small family-owned business client with 16 employees that received a $250,000 PPP loan. Because of the loan, no employees were laid off, wages were not adjusted, and the business is still in operation today. But, because the business is structured as a pass-through entity, it is subject to a 5 percent tax at the individual level that would fall to the owners. The owners did not budget for the tax upon receiving the loan and, because they have no outside income, will have to borrow on their credit to pay $12,500 in tax to Massachusetts. Remember, this is not a major corporation with millions of dollars in revenue, but a small business fortunate to still be in operation because of the PPP, yet it is being hit with this additional blow. There are many more businesses just like this one facing daunting state tax bills should this piece of legislation not pass.

Meet the Author

Amy Pitter

President and CEO, Massachusetts Society of Certified Public Accountants
My thanks and gratitude for Gov. Charlie Baker, House Speaker Ron Mariano, President Karen Spilka, and members of the Legislature for their continued leadership throughout this last year and for understanding this is an important issue for so many individuals and businesses across Massachusetts.

Amy Pitter is the president and CEO of the Massachusetts Society of CPAs, which represents 11,000 accounting professionals in the state.