We, represent cumulatively more than 9,500 employers with more than 200,000 employees implore you to conform with the federal treatment of forgiven Paycheck Protection Program (PPP) loans in the tax year 2021, just as you did in tax year 2020. This is important for the following reasons:
Taxing PPP loans would negate the purpose of the program. When PPP was first created under the CARES Act, the legislative intention was that these loans would be non-taxable. Congress saw this as so important to the program’s desired impact that they took the extraordinary step of reaffirming this in the subsequent Consolidated Appropriations Act.
Without PPP, the unemployment rates would have been much higher, more businesses would have closed their doors and the economic fallout would have been more severe.
As our state’s unemployment system was strained and crashing, PPP created a parallel unemployment system to spread the load, with many employers simply using PPP funds to pay their employees to “stay home, stay safe.”
There is a trauma associated with losing one’s job, even with unemployment insurance, and PPP kept this trauma from occurring by keeping employees on the payroll. Furthermore, personal income tax revenue to the state was not decreased due to these loans.
To tax these loans, which were always presented as a tax-free lifeline, would penalize employers who did the right thing and now do not have the funds. If these loans were to be taxable suddenly, most employers would be met with a surprise tax bill they have no way to pay after a year of being closed.
To have the loan forgiven implies that the employer spent the loan, in its entirety, on payroll and eligible expenses, leaving them with nothing to show.
Retroactively changing the circumstances around the assistance will be unfair, inequitable and create turmoil. The money to pay tax on these loans is not there as most employers have done what the program told them to do — spend the money right away.
Given the state is conforming to federal treatment in tax year 2020, those least served by the program and who only gained access in 2021 will receive inequitable treatment.
An unforeseen tax bill will prolong the economic impact of the pandemic.
Many of the businesses that were late to access this program have been the hardest hit and the least served by the program in its earlier iterations.
Finally, businesses had no control over when their loan is ultimately forgiven, as procedural hurdles prevented rapid forgiveness, dragging them into 2021 and therefore receiving that year’s tax treatment.
There is no double benefit. For example, if an employer has $100,000 of a PPP loan forgiven, they can and should deduct those expenses. Taxing what otherwise would have been deductible means that the employer is in a worse place than if they had laid off employees and sent them into the unemployment system.
Furthermore, the state already collected revenue from PPP loans in the form of payroll taxes.
In conclusion, taxing PPP loans would negate the purpose and promise of the program. Without those loans, the unemployment rates would have been much higher, more businesses would have closed their doors, and the economic fallout would have been more severe. To tax these loans, which were always presented as a tax-free lifeline, would penalize employers who did the right thing and now do not have the funds.
We, implore you to conform with the federal treatment of forgiven Paycheck Protection Program loans in the tax year 2021, just as you did in tax year 2020.
Erin Bombard, Director, business and talent development and Lake Champlain Chamber members