Attention PPP Borrowers: Beware a Tax Bite from Your State

By Alan Wolf, YSN

The experience of a small powder coating company in Minnesota can serve as a cautionary tale for PPP recipients who thought their forgivable loans came free and clear.

According to the local Fox 9 news, JIT owner Tim Milner was “absolutely stunned” when his accountants informed him of a $50,000 tax bill from the state for his $500,000 PPP loan.

Milner had used the funds to keep all 65 of his employees on the payroll after sales went south last spring. But now, he and other business owners around the country are getting hit with an April 15th surprise, as Minnesota, along with 19 other states, tax forgivable PPP loans.

“We spent every last dollar for [employee payroll],” Milner told the TV station. “So the money’s gone. So now, you have to come up with $50,000 out of nowhere.”

Related: Business Groups Urge Congress to Restore PPP Loan Tax Breaks

But there is relief in sight. While most states either conform with federal tax law or don’t tax income, others, including Wisconsin, have recently changed their statutes to provide a break to small businesses.  And the good news for Milner is that Minnesota’s state legislature is working on measures that would allocate $438 million over the next two years to cover borrowers’ tax liabilities.

“The federal government will not tax forgiven PPP loans as income and neither should the state of Minnesota,” State Senator Carla Nelson told Fox 9.

According to the Tax Foundation, a tax policy non-profit, other states including Arizona, Arkansas, Hawaii, Maine, New Hampshire and Virginia have also introduced bills to prevent PPP loan taxation. However, writes senior policy analyst Katherine Loughead, “If policymakers wish to avoid imposing taxes on these small business lifelines, they need to act quickly, as tax deadlines are fast approaching.”

In the meantime, while Minnesota’s bills remain in committee, Milner plans to use part of a second PPP loan to pay the taxes he owes on the first.

“That is about the most ridiculous situation you could be in,” he said. “Taking more of the federal government’s money, not to give it to the people, but to give it to the state.”

Click here for a state-by-state breakdown of PPP loan tax policy as of Feb. 19.