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States Taxing Federal Bailouts and Its Effects on Small Businesses

In 2020, due to the economic hardships that small businesses suffered thanks to the COVID-19 pandemic, the Federal Government put a number of plans into place to provide support and relief. These bills created the Paycheck Protection Program, the Emergency Capital Investment Program, and Small Business Tax Credit Programs, among others, that helped bailout small businesses and keep their doors open when the amount of customers and clients that they normally received dropped to very low levels. However, even though the Federal Government made those loans tax free and forgivable, some states did not follow suit, making things harder for the businesses that need them the most.

The CARES Act

In 2020, Congress and the Senate passed the CARES (Coronavirus Aid, Relief, and Economic Security) Act, which then-President Trump signed into law on March 27, 2020. Along with plenty of individual help, such as additional unemployment funds and a personal stimulus for tax payers, the Act set up a number of bailouts for small businesses. Among these were the Paycheck Protection Program, the Emergency Capital Investment Program, and the Small Business Tax Credit Program, all of were designed to put money into the coffers of small businesses, so they could recover financially, keep their workers employed and paid, and keep their businesses open.

The American Rescue Plan Act

Almost one year after the CARES Act was signed into law, Congress and the Senate passed the American Rescue Act. This Act took care of a number of different things and built onto everything put into place by the American Rescue Plan Act. President Biden signed this act into law on March 11, 2021, and it provided additional unemployment funds, more stimulus money for qualifying tax payers, and funding for a number of different organizations and businesses. The American Rescue Plan Act also made it easier for Paycheck Protection Program loans to be forgiven, as well as for that forgiven amount to be made tax-free by the Federal government. This means that the forgiven loans do not need to be declared as income on a tax return.

Paycheck Protection Program Loans

The Paycheck Protection Program was designed to help small businesses pay their employees during the COVID-19 pandemic. It officially ended on May 31, 2021, with no new loans being created or money loaned to qualified businesses. The program, known as the PPP for short, was run and backed by the SBA, or Small Business Administration, and run through banks that had an existing relationship with the SBA. Qualifying businesses could apply for funds, receiving varied amounts depending on what they needed to keep their workers employed and paid, and their businesses open.

If the company that received the loan could prove that they spent the money on their employees’ paychecks, as well as other qualifying expenses, they could apply for loan forgiveness with the Federal Government. The American Rescue Act included information that made this loan forgiveness tax free, meaning that the funds won’t qualify as income on a federal tax return.

Although the PPP loans could be forgiven, they also held a small rate of interest, as well as a generous repayment plan, designed to make it easier on the businesses that needed them. This way, a company that is on the brink of closure, one that was saved by the loan program, wouldn’t be further injured economically.  

Emergency Capital Investment Program

Other programs developed by the CARES Act and the American Rescue Plan Act included the Emergency Capital Investment Program. This program provided money to community financial institutions that provided funds to small businesses in their geographical areas. These institutions, all of which fall into the low to moderate income category, used the money from the federal government to help a number of different qualifying businesses, such as those that served the community, were owned by minorities, or were run by sole proprietors and therefore were overlooked by the main PPP program. This money, which was given in the forms of grants, loans, and other means designed to help people.

Small Business Tax Credit Program

In addition to the Paycheck Protection Program and the Emergency Capital Investment Program, both the CARES Act and the American Rescue Plan Act created a number of tax programs for small businesses. These included the Employee Retention Credit, which gives businesses the chance to offset their payroll tax liabilities. Each quarter, they can offset their current tax liabilities by up to $7,000 per employee per quarter. There is also a Paid Leave Credit that employers can take that provides a tax credit of $5,000 for companies that gave sick and personal time to employees who needed time off due to the pandemic. Since the CARES Act and the American Rescue Plan Act provided additional funds for these employees who needed to take this time off, it makes sense that these companies (the ones that have under 500 employees) could use the tax credit.

States Start Taxing Federal Bailout Funds

Although the Federal Government set it up so that these bailout funds are considered to be tax free, as they don’t need to be declared as income on a tax return sent to the IRS, some states viewed things differently. For example, there are currently 12 U.S. states, including California, Florida, Hawaii, Minnesota, Nevada, New Hampshire, North Carolina, Texas, Utah, Vermont, and Washington that view those forgiven funds as taxable income. These states are requiring all companies that received Paycheck Protection Program funds, but especially those who had their loans forgiven, to include them as income on their state tax returns. This means that the small businesses who were in trouble or are on the brink now need to come up with more money to pay their state taxes.

Issues with Having to Pay Extra Taxes

While many businesses make quarterly tax payments to both the state that they do business in, as well as to the federal government, these additional owed funds from the federal bailout loans came as a surprise to many companies. Since it’s easier to make a quarterly tax payment, as it’s a smaller amount, plus something that’s anticipated and can be planned for, the extra amounts wound up hurting these companies. Many of the businesses that received the loans were in financial jeopardy beforehand, and, even if the loans did indeed help quite a bit as they were intended to do, now those companies are back in financial danger. The end results? More small businesses may be close to closing their doors and going out of business.

Small Businesses on the Brink

With small businesses nationwide on the brink of failure, having to pay extra tax money is quite problematic. Companies that needed to be bailed out, due to their financial hardships, obviously have a hard time paying for things like employee salaries, new merchandise, utilities, and more, making it even more difficult for them to come up with the additional funds for their state taxes. As a result, these companies come even closer to closing their doors for good.

Unfortunately, because COVID-19 pandemic, plenty of small companies did go out of business. They lost customers and clients, had to pay for additional items, like personal protective equipment, and more, leaving them little funds for paying employees and even the business owners. Although the CARES Act and the American Rescue Plan Act were designed to help these companies and keep them afloat during these tough times, many states did not see things the same way.

Do You Have Questions About the Federal Bailouts and Your State Tax Status?

If you’re a small business owner in one of the states that are charging taxes on Paycheck Protection Program loans (even forgiven ones) or simply have questions about the changes that have been temporarily made to the tax code, such as the Paid Leave Credit and the Employee Retention Credit, then you need to see a professional tax preparer. One can help walk you through the process of setting up your state and federal tax returns, paying the additional funds to the state as needed, and more. Since the taxes of a small business can be complicated, and are made even more so by the additional credits and taxes owed, it’s important to request the help that you need. A professional tax company can answer all of your questions, help with your return, and communicate with the state and federal government on your behalf.

Contact Us Today

If you have received a federal bailout loan from the government, have had it forgiven, yet were taxed by your state for the amount, treating it as income, then reach out to the tax advisors at Enterprise Consultants Group. We can answer your questions, discuss your rights, and provide actionable options. Please contact us online or at (800) 575-9284 today to schedule a free and confidential consultation to see how we can help you.

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