Attorney Joseph A. Camilli
This third installment of our multi-part overview will discuss the current State of Wisconsin taxation of PPP loans, both with respect to the deductibility of expenses paid with PPP proceeds and the income tax treatment of the PPP funds themselves. As always, please keep in mind that the details of any of the programs discussed require close analysis with your accountants, bankers, or legal counsel to insure the programs are right for you and your business.
[On Tuesday, February 16, 2021, the Wisconsin legislature passed legislation that would bring Wisconsin in line with federal treatment with respect to the deductibility of business expenses paid using PPP funds for the 2020 tax year. As the rest of this blog explains, Wisconsin had diverged from the federal government’s approach to deductibility, originally taking the position that by permitting expenses paid with PPP proceeds would confer a double tax break upon PPP recipients (the PPP loans are completely forgivable if the proceeds are used for permitted expenses within certain ratios). As reported, Wisconsin Assembly Bill 2 would make otherwise deductible business expenses paid using PPP funds deductible from Wisconsin State taxes. These bills must still be signed into law by Governor Evers, but given the wide legislative support that they have received, it would be surprising to see these bills vetoed.]
Wisconsin Department of Revenue Announcement
On January 22, 2021, the Wisconsin Department of Revenue (WDOR) announced how Wisconsin would be treating 2020 Payroll Protection Program (PPP) loans, and businesses’ use thereof, for Wisconsin tax purposes. The announcement was necessary due to uncertainty over how Wisconsin would treat 2020 and 2021 PPP loans following the federal government’s passage of the Consolidated Appropriations Act (CAA) of 2021, which itself addressed certain confusion or uncertainty in the Coronavirus Aid Relief and Economic Security Act (CARES) of 2020.
2020 PPP Loans
As the WDOR notes, Wisconsin follows federal tax law prior to the passage of the CAA. Therefore, Wisconsin follows the tax treatment of PPP loans and expenses established by the CARES Act itself. According to the WDOR, this means that the PPP loans received and forgiven in 2020 are excluded from the calculation of the business’s income in 2020 for income tax purposes. However, because Wisconsin does not follow the rules set forth in the CAA, businesses may not deduct otherwise deductible expenses paid using PPP funds from their income tax calculations. Under the CAA, Congress extended the tax benefits of PPP loans by granting, essentially, a second tax benefit to employers (free money excludable from income, plus a deduction from income for the business expenses paid with a that free money).
There are certainly reasonable justifications for Congress granting the second tax benefit (many businesses are struggling and can use whatever help they can get) but there is also a reasonable justification for Wisconsin not following suit: namely, that doing so may potentially result in a loss of close to $450,000,000 in tax revenue, further exacerbating the State’s budget crunch.
It should be noted that the WDOR clearly indicated at the time (January 22, 2021) that there were no legislative proposals before the Wisconsin legislature to address this situation, one way or the other, and as of the date of this blog post, there is still no indication that the legislature will take this matter up.
2021 PPP Loans
Perhaps surprisingly, perhaps not, the WDOR clarified that for 2021 PPP loans, the State intends to treat forgiven PPP loans and expenses paid with PPP proceeds in the exact opposite manner. Given that the CARES Act applied to the exceptional circumstances of 2020, it is not terribly surprising that the WDOR would apply traditional pre-CARES Act analysis to debt forgiveness. Loans forgiven are traditionally treated as income and therefore because Wisconsin has not legislatively agreed to follow the CAA, PPP loans received and forgiven in 2021 will be included as income for business income tax purposes.
Similarly, WDOR is taking the traditional position that deductible expenses are simply that: deductible. It would appear that Wisconsin has either (a) not considered these matters carefully or, more likely (b) has made the determination that it is comfortable granting only one tax benefit to business owners from forgiven PPP loans and not both.
Future installments will discuss changes to the Economic Injury Development Loan (EIDL) program, Employee Retention Tax Credits, Mandatory Vaccine Programs, and more.
The guidance provided above is general in nature and readers are encouraged to reach out to Neider & Boucher, S.C., or to their own legal counsel to determine the applicability of these issues to their own personal and/or business needs.