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Tax Day, legislative adjournment converge in PPP and unemployment debate

While the pandemic surged and re-surged across Minnesota over the course of 2020, the federal government instituted several new programs in an attempt to keep the country from having its health emergency compounded by an economic one.

The feds sent extra payments to those receiving unemployment insurance benefits. They also offered forgivable loans to businesses so they could keep employees on even if revenues plummeted. It was called the Paycheck Protection Program, or PPP.

But there was a problem when that money reached Minnesota: While those loans and unemployment payments were tax-free at the federal level, the Legislature and governor would have to agree to alter state law to have taxes not be taken out by the state.

They have yet to do that. So Monday, May 17, is not only the constitutionally mandated day that the Legislature must wrap up its business. Thanks to a COVID-inspired extension, it’s also this year’s April 15, the day tax forms are due to both the federal and state governments.

Hence, many individuals and businesses have either held off on filing, have requested extensions, or are expecting to file amended returns after the law changes, if it does.

House Minority Leader Kurt Daudt and Rep. Greg Davids urged House DFL leaders May 12 to pass a federal tax conformity bill that fully exempts Paycheck Protection Program and Unemployment Insurance from Minnesota taxes. Photo by Paul Battaglia

Will it? It certainly looks that way, especially since it was announced Monday that $2.8 billion is coming the state’s way as part of the American Rescue Plan Act. (It’s closer to $5 billion, if you add in direct aid to county and local units of government and capital projects.)

So the haggling over how much the state can afford to make tax exempt is beginning to look moot, as Minnesota Management and Budget and Department of Revenue officials said Tuesday they interpret federal guidance as saying that conforming to federal tax law is an eligible use of the dollars.

House Minority Leader Kurt Daudt (R-Crown) and Rep. Greg Davids (R-Preston) — the Republican lead on the House Taxes Committee and a member of the Tax Conference Committee — spoke in front of the State Capitol Wednesday morning, advocating for quick passage of a bill to make both PPP loans and unemployment benefits tax exempt.

On the subject of PPP, Daudt said, “If they wanted to have those loans forgiven – which most of them did – then they had to spend all of those dollars. They were not allowed to set aside money to pay taxes on those dollars. … Unfortunately, Minnesota law didn’t foresee this, and those businesses are being taxed on those dollars as if it was income.”

“If you take a map of the Midwest, you will see that Minnesota is the only state that is taxing PPP and is taxing the unemployment benefits,” Davids said. “Let’s bring the Senate bill up on the House floor and make it even better. … But, even if we did it this afternoon, there isn’t enough time. So you’re going to see a lot of extensions unnecessarily.”

“People will have to file amended returns whether we have an agreement now or 10 days from now,” House Speaker Melissa Hortman (DFL-Brooklyn Park) said Wednesday afternoon. “In past cases when tax changes were made late in session, (Department of) Revenue has been able to apply those changes to amended returns.”

Davids was referring to a bill that passed the Senate on March 20, but that bill only conformed to federal tax law on PPP, not unemployment benefits. It made 18% of what recipients got tax exempt, not the feds’ much larger total of everything up to $10,200.

Meanwhile, the omnibus tax bill passed April 22 by the House conforms to federal tax policy on unemployment benefits, but puts a cap on how much of forgiven PPP loans could be deducted from gross income ($350,000 per loan).

The Tax Conference Committee continues to discuss that bill, which has significant differences in other areas, such as House provisions for a fifth income-tax tier and taxing corporate profits held in offshore accounts.

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