Maine businesses would be required to pay state income taxes on federal paycheck protection forgivable loans that are not taxed by the federal government, according to a budget proposal by Governor Janet Mills.
The government told lawmakers Monday that the state government could face more than $ 100 million in lost revenue if the state were to fully comply with the changes to federal tax law passed by Congress in December. These changes exempted PPP loans from federal income tax and allowed companies to also claim the costs for which the loans helped to cover.
“Now the federal government allows a dual benefit, both excluding the loans made from income and accounting for the associated expense deductions – deductions that now offset other income,” said Kirsten Figueroa, commissioner for administration and financial services for Maine lawmakers. “In fact, the federal government is using the tax law to provide additional tax incentives for PPP loan recipients. With no additional resources for states to fund these efforts, this is a compliance requirement challenging state governments across the country. “
Figueroa noted that the change in federal policy came just days before the end of 2020, which came into effect on December 27th. The issue was discussed in a public hearing of the Legislative Committee on Funds and Finances on a supplementary proposal from the Mills government on the state budget.
Further public hearings on the Mills budget proposal are scheduled for Tuesday, Wednesday and Thursday of this week. Once the committees have collected the testimony on the proposal, they will hold a working session on the measure to vote on a recommendation on the draft law that has yet to be voted on by the entire legislature. As an emergency measure, two-thirds of the support in both the House and Senate is needed to go into law. These votes are expected to take place in the Augusta Civic Center in mid to late February.
Representatives of the Maine State Chamber of Commerce, the National Federation of Small Businesses and Hospitality in Maine, which includes over 1,000 restaurants and hotels in the state, urged lawmakers to comply with the latest federal law that does not just affect the amount of PPP loans granted exempt from taxation but also allows companies to deduct the costs paid through PPP loans from their overall bottom line.
The forgivable loan program passed by Congress last spring, designed to help companies weather the COVID-19 pandemic and keep workers on payroll, added $ 2.3 billion to the economy during the pandemic Maine brought in.
Maine businesses have taken out more than 28,000 loans under the program, and local banks have prepared for a second round of PPP loans. In January, the US Treasury Department approved an additional $ 284 million for the program.
If the business world prevailed, not only would the recipients of PPP loans not have negative tax consequences, but would actually receive a net tax benefit if they could deduct the costs paid with PPP funds.
Mills’ supplementary budget proposal also foresees several other important measures, including a provision that allows for a state tax credit for any Mainer who is now working from home and may already be paying taxes in the state the company is in for that he works. Other regulations protect the state’s tax credit for low-wage workers by setting the credit on their 2019 income instead of their 2020 income.
Mills’ proposal mirrors federal law by exempting the direct stimulus payments of $ 1,200 and $ 600 from state income tax and including unemployment payments, including increased federal unemployment benefits, as income.
Figueroa said Mills would have preferred to mirror federal policies on PPP lending, but the state does not have the luxury of deficit since the Maine Constitution requires a balanced state budget. The possibility of additional federal aid to states, however, could lead to another budget change before lawmakers pass the government’s proposal to fix the current state budget, which ends June 30th.
“Right now, the people of Maine are focused on what is most important: They are trying to keep themselves healthy, take care of themselves and their families, and overcome this pandemic,” Mills said in a prepared statement. “With this package, my administration is maximizing tax breaks where and whenever possible, and providing as much stability and predictability for Maine businesses as possible. We are doing all we can to help the people of Maine through these troubled times. “
Mills’ proposal was supported by some, including those campaigning for economic policies that will benefit Maine’s poorest, but Republican lawmakers see the move as detrimental to the state’s already struggling small businesses.
“These small businesses don’t really care what it is like. It would be devastating to take away the savings they put aside for this winter and spring, ”said Jeff Timberlake, Senate minority leader, R-Turner. “With that money they wanted to pay for their heating bills, pay their employees, and survive – all the things the program was designed for.”
The legislature’s testimony on Monday was also one-sided in favor of the state, which fully complied with the federal government in exempting PPP funds from taxation.
Greg Dugal, of Hospitality Maine, said the loss of income caused by pandemic-induced hospitality restrictions was five times higher than the losses incurred during the Great Recession in 2009.
“Without the PPP and Maine’s recovery grants, half of our industry would cease to exist by 2021,” said Dugal. “In this devastating economic era, we all know for a fact that small businesses shouldn’t receive unexpected income tax bills of $ 1,000 or more based on a federal government bailout.”
Dugal said the bill would come at the worst possible time for restaurants and accommodation – at the height of winter – when outdoor dining is dramatically restricted and most businesses run out of cash.
“It will also be a time when they need money to buy supplies to reopen or ramp up for the upcoming summer and fall seasons and possibly the end of the pandemic,” Dugal said.
Dugal noted that Maine recovery grants offered by the Mills administration using federal CARES law would also be taxable. Dugal said the industry is grateful for state and federal funds that have been used to save the hospitality industry, but an additional tax burden could “be the last straw for some companies”.
And the clock is ticking for the 2020 tax return season, said Patricia Brigham, executive director of the Maine Society of Certified Public Accountants.
“As the de facto tax advisor to so many small businesses in the state, we urge you to review compliance,” Brigham told legislative committees on funds, finance and taxation. Brigham said accountants understand this would become a new government expense, but she said it would not create new financial uncertainty and reduce cash flow for many Maine companies that are still working to get out of one of the pandemics limited economy to recover.
“In general, compliance provides businesses and auditors with predictability and greatly streamlines the tax filing process so that organizations can focus on their business, not necessarily their tax filings,” said Brigham.
Rapidly changing federal tax legislation, backed by the federal government’s ability to deficit spending, has failed Maine and other states, most of which have constitutional requirements for budget balance.
While Congress has sent billions of dollars to states to help them respond to the COVID-19 pandemic, it has failed to allocate resources that will enable states to replenish tax revenues from a pandemic-crippled economy have been lost.
Fred Brewer, a Bath CPA, said he and many of his clients recognized the situation the government was facing and while urging lawmakers to pass new budget and tax laws that complied with the federal code, it was also important that they get the job done quickly.
According to Brewer, around 40 percent of its customers received PPP funding across the spectrum. He said companies he works with have a number of responses to the possibility that the state would not exempt expenses paid for with PPP funds.
“I want to convince you of the importance of making this decision quickly,” said Brewer. “Even if you make this decision today so that we can start processing tax returns, you will have at least two to three weeks before the tax preparation software can be updated for any changes you have made.”
Not all of those who testified were in favor of full compliance with federal tax legislation.
Sarah Austin of the Maine Center for Economic Policy, a left-wing organization advocating economic policies that help low-income Mainians, said many of the federal tax breaks went to companies that weathered the pandemic well, including real estate agents and hedging fund managers.
“Maine is in a better position to focus the resources all Mainers need in order to overcome this pandemic,” Austin said. “These are safe schools, access to health care, childcare, good infrastructure and job protection.”
Austin also noted that while PPP loans were tax-free, unemployment benefits for workers who lost their jobs during the pandemic were not.
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