The Importance of PPP Deductibility From Tax Liability

Tax relief is coming to nearly 90,000 Wisconsin businesses that received federal Paycheck Protection Program (PPP) loans under the CARES Act last year. Without the action of the Wisconsin State Legislature, these businesses were facing close to a half-billion dollars in unexpected taxes. The NTU team was happy to work with state lawmakers to ensure a win for small business owners and taxpayers alike.

Legislative action was necessary when the state’s Department of Revenue (DOR) announced last month that expenses paid for with PPP loan revenue would not be deductible for state tax purposes.

A similar situation occurred with PPP deductibility at the federal level when the IRS initially planned to treat PPP loans as taxable income. That was never the intent of Congress when the CARES Act was first enacted. Much like when a natural disaster hits, individuals and businesses receiving funds through the Federal Emergency Management Agency (FEMA) are not expected to report the emergency funds as taxable income. FEMA funds are needed, after all, for emergency purposes. Congress intended to treat PPP loans in the same manner – relief for businesses that have struggled to keep their doors open during the global pandemic.

In December, Congress restated its original intent by enacting legislation to allow federal tax deductibility for both first round and second-draw funding under the PPP.  While some states automatically conform to federal tax rules, it is up to many states to enact conforming legislation so as not to heap further burdens on businesses hit hard during a year of coronavirus lockdowns and restrictions.

Thanks to the leadership of State Senator Roger Roth, legislative action was taken to correct the problem in Wisconsin and last week the full legislature approved the plan with sweeping bipartisan support. The legislation was part of a larger bill signed into law by Governor Evers and it guarantees that expenses paid for with PPP loan money will be deductible on state tax returns.

This was great news to countless small business owners who took out PPP loans to keep their doors open and their workers employed during one of the worst economic downturns of our time. The last thing they needed was a surprise tax bill to top off this  tumultuous year.

A recent episode of Wisconsin Business Voice interviewed Mike Covelli, general manager of North Lakes Cooperative in Hayward. Covelli credits the PPP loan for helping him cover payroll for 54 employees last spring. Without legislative action, the company would have faced an additional tax bill of $30,000. Thankfully, this is one less problem facing Covelli and other Wisconsin business owners as they continue to deal with the extraordinary pressures placed on them during the pandemic.  The NTU state government affairs team was happy to be an advocate for Wisconsin businesses and taxpayers on this issue.