State agrees on forgiving taxes on PPP loans, unemployment bonus payments

May 17—An agreement by state leaders to forgive taxes on PPP business loans and on $10,200 in unemployment benefits is being cheered by business owners and will allow tax preparers to finish work for clients in what has been a year of changing tax rules.

"That's very good news. It's the right thing to do," said Ron Vetter of Vetter Stone about the Paycheck Protection Program tax forgiveness.

"I don't think it was ever the intention when they did those (PPP loans) that they'd be taxed."

Jim Dauk, a CPA with Kitchenmaster, Klooster & Begalka in North Mankato, said the announcement brings guidance on some of the biggest remaining tax uncertainties spawned by COVID-19-relief packages.

"It's good to finally have an answer. It's good news for taxpayers," Dauk said. "But it's unfortunate it had to drag on to the midnight hour. This has been a more frustrating and challenging and difficult year than normal."

On Monday, Gov. Tim Walz and legislative leaders from both parties announced they had agreed on a state budget deal that will bring Minnesota's tax rules on unemployment payments and forgiven PPP loans in line with federal rules. Many states already had conformed to federal rules, but the issue became bogged down in Minnesota as leaders negotiated a state budget deal.

The Legislature was scheduled to adjourn the session Monday at midnight and will have to come back in special session, likely in June, to approve the budget deal they have agreed to. It's unclear whether business owners will have to refile their taxes, as Monday also marked the tax file deadline, but state officials say they're working through the process and will have more guidance in the coming weeks.

A record number of Minnesotans filed for unemployment benefits in 2020 and state taxes were not withheld from the extra $600 and $300 weekly bonus payments authorized by Congress.

Dauk said that if someone collected $10,200 in those weekly bonus benefit payments and are in the middle tax bracket, they owed nearly $700 in state taxes. For all those who filed their taxes already — or sent them in Monday, the deadline for individuals to file — they will have to wait for the state Revenue Department to recalculate those returns and issue a refund to affected taxpayers.

Dauk said taxpayers will likely not have to file amended returns to get their refund.

"Those who have filed already will get refunds at some point. How long it takes, I have no idea."

PPP loan clarity

For the many businesses that received PPP loans, the dollar amounts involved in Monday's announcement are much larger.

While they are described as loans, businesses had the loans forgiven as long as they used the money for intended uses, mainly keeping their employees on the payroll during the depth of the pandemic.

But under state law, forgiven loans are usually considered income and taxed, requiring the state Legislature and governor to approve conforming to federal rules that treat the forgiven PPP loans as untaxed.

For a business owner in the middle tax bracket, the taxable amount on the loans would be nearly $7,000 for every $100,000 in PPP loans they received. Many businesses in the region received loans ranging from tens of thousands to several million dollars.

"We've been watching that issue," Vetter said of how Minnesota would handle the PPP tax. "That's been a wild card and I think we were one of only states that didn't conform (to federal rules)."

Vetter said the pandemic greatly impacted their business, which quarries and fabricates Kasota limestone and other stone.

"It hit commercial construction significantly."

Vetter said that even if they did have a lead on a potential commercial client, it was difficult to find architects to begin working on design plans because they were spread out and working from home. "It was hard to engage with people. You couldn't just walk in an office and have several architects to talk to."

Vetter said his company quickly refocused on other types of business they haven't been heavily involved in before, including pursuing more middle and high-end residential clients.

"The residential market was robust. I think that will continue."

Vetter said universities also took the opportunity when students weren't on campus to do renovation.

He said business is continuing to tick back up on the commercial side, but said the pandemic forced Vetter Stone to become more diverse in its client mix, something that will continue when things are back to normal.

"Things were down because of COVID, but you just have to get really creative."