Blue states move to tax PPP loans, collect millions from unsuspecting small businesses

Late last year, a thorn emerged in the side of the historically successful Paycheck Protection Program (PPP), which provided $525 billion in forgivable loans to more than 5 million American small businesses hurt by the pandemic. Suddenly, business owners feared facing a tax consequence for the aid they received.

Though the PPP funds themselves were nontaxable, the IRS was attempting to tax the use of the funds on business expenses that cannot be deducted from tax returns. A coalition of small businesses and trade associations promptly wrote Congress to explain that the tax burden the IRS was attempting to levy against American small businesses would make it cheaper for some businesses to fire employees and repay their PPP loans than face the tax consequences.

Additionally, the coalition argued the roughly $120 billion in PPP taxes that the IRS was attempting to collect would be far better served circulating on Main Street, generating revenue and helping along the American economic recovery.

In December, Congress yielded to the calls of small businesses and added a provision in the second stimulus package that provides a tax break on PPP funds for small business owners. But now, some states are re-introducing the issue, opting not to conform to the federal tax code guidelines and instead moving to unexpectedly tax PPP recipients.

Alfredo Ortiz, the President and CEO of the Job Creators Network, a group that advocates for the 30 million in American small businesses, said that the states attempting to tax small business’ PPP loans are "basically handing drowning men anchors."

"We’re trying to ring the alarms on this, because it’s a huge issue," Ortiz told Just the News. "The reality is that our small business owners don’t have that cash laying around. They used it for what they were asked to use, and told to use it, for," meaning, maintaining payrolls during the lowest point of the pandemic last year. Ortiz says that the state taxes will be "completely unexpected expenses to most small business owners" and could send many more to insolvency or closure.

"We’re hearing this happen left and right in New York City. A lot of restauranteurs and restaurant owners are just closing up shop and saying 'this is ridiculous, we don’t want any part of it,'" said Ortiz. Many of those owners are moving to places like Florida, where business has been open at workable capacity for months now, and the tax base is generally much more favorable.

Put simply: inflicting unexpected taxes on small businesses across the country whose owners used their PPP funds to maintain their employees’ salaries will not only drive some businesses to extinction, but will also limit the ability of others to hire once the economy is back in full swing.

In Virginia and Wisconsin, more than 200,000 small businesses are now liable for hundreds of millions of dollars in state taxes. In California, where more than 600,000 PPP loans were distributed, businesses that have barely been allowed to open at all this past year, are now facing millions in taxes they were not expecting. It should come as no surprise that small businesses of all sorts are picking up and moving to friendlier terrain especially when the Biden administration has paid little attention to their issues, Ortiz said.

"Small businesses are not being helped by the Biden administration, that’s the reality," said Ortiz, especially as compared to the former administration, that prioritized the growth of small businesses and American entrepreneurship. "Two-thirds of that new job growth that we enjoyed under the Trump administration was coming from small businesses."

As President Biden begins his tour to tout the the implementation of the $1.9 trillion spending package he signed into law last week – called the American Rescue Plan – Ortiz says he is disheartened at how little of the funds in that bill are actually going to small businesses. Of the $1.9 trillion being spent, just $7.25 billion is being added to the Paycheck Protection Program, though the bill does include billions in targeted grants for the restaurant industry.

"It’s really unbelievable that the Biden administration, and the president himself, isn’t working harder on this," said Ortiz. "President Biden is showing no leadership."