Legislative compromise will end state tax on PPP grants
Bill would cost the state $130 million
WITH A WEEK to go before business taxes are due on March 15, Massachusetts lawmakers signaled that they are prepared to join with the Baker administration and act to avert a state tax bill on business owners who accepted federal money to keep their doors open during the pandemic.
In a joint statement issued Monday, House Speaker Ron Mariano, Senate President Karen Spilka, and the chairs of the Ways and Means Committee, said they were releasing a business-focused bill that includes tax relief for these business owners.
The leaders said under the bill, the state will not tax income from Paycheck Protection Program loans that were given to small businesses organized as “pass-through entities,” which would otherwise have been considered taxable income. “To help many small businesses and employers who received PPP loans to stay afloat and save jobs, we have agreed to conform to the current federal tax code to exclude forgiven PPP loans from gross income for small businesses organized as pass-through entities,” the leaders wrote.
The Paycheck Protection Program was established under the first federal stimulus package, the CARES Act, and was intended to help struggling small businesses stay afloat during the pandemic — and keep workers employed.
At the corporate level, the federal government already makes PPP grants tax-free, and that will extend to state corporate taxes as well. But small businesses – such as sole proprietorships, partnerships, and limited liability companies –– are considered “pass-through” businesses, which make them liable for the 5 percent state income tax.
At a hearing last Tuesday on Gov. Charlie Baker’s fiscal 2022 budget proposal, Secretary of Administration and Finance Michael Heffernan said the administration supports making Paycheck Protection Program grants tax-free. Heffernan said that for small business owners of “pass-through” entities, who report the money as income, the grants would be taxable through state income taxes – translating to around $130 million in state income tax payments. Heffernan said the administration was “actively discussing with the Legislature” making PPP grants tax-free at a state level for these individuals.
Bipartisan legislation led by Democratic Sen. Eric Lesser of Longmeadow, who chairs the Committee on Economic Development and Emerging Technologies, and co-sponsored by the Senate’s Republican minority leader, Bruce Tarr, and others sought to do away with the 5 percent state tax on the forgivable loan.
Some legislators held a briefing Monday morning with Massachusetts Fiscal Alliance, a conservative leaning think tank that has backed efforts to keep the Paycheck Protection Program from state taxation.
“In Massachusetts, it’s the small businesses getting hit hard,” said Sen. Ryan Fattman, adding that the larger companies get to avoid the tax.
Tarr said on the briefing call that the issue should be a top legislative priority. “The businesses that have received these PPP loans have paid, and continue to pay, a heavy price for the things that we’ve needed to do to protect public health,” he said. “It’s a simple thing to do, to be able to say that, like the federal government, we are not going to tax a PPP loan and convert it to a grant.”
Tarr said any tax revenue the state would give up “would be more than returned in terms of the continuing survivability and viability of the businesses that we’re going to help.”
Kurt Wise, a senior analyst at the liberal-leaning Massachusetts Budget and Policy Center, dubbed the relief a “double dip” tax break. The center argues that because businesses are taxed only on their profits, any PPP money that was spent as it is required to – on payroll, utilities or other expenses – is not directly taxable anyway, since the revenue is offset by expenses. The tax break only becomes beneficial once the business turns a profit.
“The bill would allow them to deduct their tax-free, gifted PPP dollars from any other taxable income they might have generated,” Wise said in an email. “Notably, this new ‘double dip’ tax break would go to profitable businesses (or those with other sources of income they can offset), not to the struggling businesses impacted by the pandemic.”CommonWealth reporter Shira Schoenberg contributed to this report.