Maine businesses and nonprofits could be saddled with heavy tax bills for taking forgivable federal emergency loans in the early days of the pandemic unless legislators act to bring the state’s tax laws in line with federal statutes.
Maine employers have taken out more than $2.2 billion in Paycheck Protection Program loans since April, with many expecting the loans would be forgiven – converted into grants – if they met program rules.
Forgiven portions of loans are not subject to federal income tax under the CARES Act, which created the loan program. But employers still will have to pay Maine income tax – up to 7 percent – on the forgiven portion of the loans unless lawmakers pass an amendment to state law.
“Maine does not conform to this federal law,” said Trish Brigham, executive director of the Maine Society of Certified Public Accountants. “Even if the loan is forgiven at the federal level, you will still have to pay Maine state income taxes.”
More than 27,000 Maine employers took out loans for as much as $10 million and as little as a few thousand dollars through the program. Its intent was to keep workers on the payroll and basic business needs covered until pandemic conditions eased and normal business resumed. If employers spend at least 60 percent of the loan on payroll and meet worker retention and other benchmarks, the full amount of the loan will be forgiven.
But an unexpected tax payment next year on the proceeds of forgiven Paycheck Protection Program loans could further damage small businesses crawling their way out of the recession triggered by the pandemic.
Maine’s public accountants warned about the tax implications for small businesses in a May letter to Gov. Janet Mills and urged legislative action to resolve it.
“Failure to conform will impose Maine income tax on Maine small businesses who are recipients of a forgiven PPP loan – something which will likely come as a great surprise to many Maine businesses and would directly undermine the intent of the PPP in helping our small businesses survive the crisis,” the CPA society said.
Months later, and with the Legislature still not called into session, the need to address the problem is more urgent, said Mike Santo, senior manager at Wipfli LLP, a national accounting firm with an office in Augusta.
Some employers will start tax preparation in a few months, and electronic filing programs need time to add new forms to their software, he said. Starting work on a tax conformity bill in January, when the Legislature convenes for its normal session, leaves little time to make that happen before taxes are due in April.
“We start tax planning in October, sometimes even September,” he said. “Those months are not far away – I don’t see businesses suddenly being at 2019 levels in a few months.”
Lawmakers have been under pressure to return to Augusta for a special session to complete unfinished business and take up bills intended to enhance the state’s response to COVID-19.
Republican legislators refused last week to cooperate with leaders of the Democratic majority on convening a special session, saying they wanted only to discuss limiting the governor’s authority under a state of emergency and pandemic-related measures. They also cited health concerns about meeting to consider non-emergency issues.
The Legislature’s Taxation Committee will meet next week to discuss a number of bills, likely including a tax conformity measure, said co-chair Sen. Ben Chipman, D-Portland.
“Personally, I don’t think businesses should be taxed on the funds they are receiving from those loans,” Chipman said. “Conformity is something we need to do right now. That is why I support us coming back into session.”
“We need to get that taken care of – I don’t think it will be controversial,” Chipman added. “We just need everyone to be on the same page coming back into session because there are things like this that need to be addressed.”
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