The Virginia General Assembly is moving forward with legislation that would effectively make employers who received Paycheck Protection Plan (PPP) loans liable for state taxes. Bills that would practically exempt all income from the forgiven loans have been replaced with legislation that caps how much of the loan is exempt. Business advocates warn that the taxes could surprise the struggling businesses that the PPP loans were meant to help.
The bills bring Virginia’s tax code into conformity with the IRS; Virginia’s tax law doesn’t automatically change to match federal law, so state legislators pass tax conformity bills.
The IRS originally wanted to tax the forgiven loans as regular income, but in December, the U.S. Congress voted to allow businesses to deduct expenditures paid for with PPP funds from their taxable income, effectively making the PPP funds tax-free, according to tax specialist at Small Business Specialists Jenni Baker.
However, the conformity bills moving through the Virginia General Assembly have caps on how much of the PPP fund expenditures can be deducted from taxable income for Virginia’s state tax.
Delegate Joe McNamara (R-Roanoke), Senators Chap Petersen (D-Fairfax) and Todd Pillion (R-Washington) introduced tax conformity bills that wouldn’t have capped PPP loan deductions, but legislators chose to incorporate elements of those bills into conformity bills with caps.
“My preference was certainly to eliminate the taxation or to follow the federal guidelines for the taxation on PPP loans,” McNamara said. “That did not get out of committee. But a portion of my bill was rolled into the conformity bill.”
McNamara said this became a partisan issue, with Democrats wanting to tax the forgiven PPP loans. He said, “There’s a certain school that believes those revenues should accrue to the Commonwealth of Virginia and you should use those revenues for our operations.”
The House of Delegates’ conformity bill, HB 1935, introduced by Delegate Vivian Watts (D-Annandale), caps the deduction at $25,000. In the Senate, SB 1146, sponsored by Senator Janet Howell (D-Fairfax), originally didn’t have any deduction, but was later amended to include first $50,000 and then $100,000 deductions. Both bills have passed their chambers and are being considered in the opposite chamber.
Governor Ralph Northam’s administration recommended that legislators not conform to the federal exemption. In January, State Secretary of Finance, Aubrey Layne told The Virginia Star that it would be unfair to not tax the forgiven loans since not all businesses received the loans. Additionally, by not taxing the loans, Virginia could lose out on $900 million in revenue.
According to data from PPP Directory, about 85 percent of PPP loans in Virginia were under $150,000. However, that 85 percent of businesses only makes up $3.3 billion in loans; Virginia has received at least $9.5 billion in the loans.
Business advocates warn that the taxes could surprise Virginia business owners, some of whom have been hit harder by COVID-19 than others.
“Most people don’t understand it enough to care about it until they’re like, ‘Oh crap, I’m going to pay tax on that,'” Baker told The Star.”I sent an email to my clients, a pretty big email to them saying, ‘You need to contact your people now. You need to send this to everybody you know, because this is huge.'”
Baker said business owners will also face state and federal taxes for other relief they’ve received, including grants.
“You don’t just have the PPP to account for, you have the state and local grants,” she said. “The state and local are taxable at the federal level and the state level.”
McNamara thinks the legislature will allow some deductions on PPP loan revenue. He said, “We will probably work those bills out. So I think we’ll end up with some level of PPP loan forgiveness, but not 100 percent which was my goal.”
He added, “I think the businesses that were getting these loans for the most part, they were utilizing them to keep our people employed, and I don’t want them to be penalized unknowingly or unexpectedly by the state not following the federal guidelines as far as tax treatment.”
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