PPP-linked tax break heads to governor’s desk

Businesses that received federal loans during the COVID-19 pandemic and got to keep the money tax-free will get an additional state tax deduction, costing the state more than $400 million under legislation that passed the Assembly and Senate Tuesday.

The hefty tax break is part of a broader and largely uncontroversial bill to update Wisconsin’s tax code. The overall bill, AB-2, passed with broad bipartisan support in both houses, suggesting that Gov. Tony Evers will sign it when it reaches his desk. The final vote was 89-3 in the Assembly and 27-5 in the Senate.

Debate on the legislation Tuesday focused on a late addition to the bill — a tax deduction for businesses that received money through the federal Paycheck Protection Program (PPP). The PPP is a federal program of loans that could be forgiven if the businesses receiving them used at least 60% of the money to cover payroll costs.

PPP funds themselves are tax-free under both federal and state laws. Standard tax rules typically don’t allow businesses to take a tax deduction on expenses that have already been reimbursed and aren’t paid out of taxable business revenues. In an exception to that principle, however, the federal Consolidated Appropriations Act (CAA), passed in December 2020, allows businesses receiving the tax-free PPP money to take a federal tax deduction on the expenses those funds cover.

After the passage of the federal law, Wisconsin Manufacturers & Commerce along with other business lobbying groups began campaigning to extend the same tax break for PPP-covered expenses to Wisconsin’s tax code, and lawmakers attached the provision to an existing bill of routine updates to the state tax code recommended by the state Department of Revenue (DOR).

Before the final votes Tuesday, Democrats in each house urged the majority Republicans to revise the legislation in order to target the tax break’s benefits — estimated at between $400 million and $500 million — to those business owners who they argued were the most in need of help. Their pleas were largely rejected.

“Our business relief efforts should give speedy relief to the businesses that need it,” said Rep. Tip McGuire (D-Kenosha), advancing a proposal to cap the amount of the PPP-paid tax deduction at $250,000.

That change would have given 90% of companies getting PPP money the full deduction, said McGuire, while saving more than $200 million. “We would invest that into a grant program that would be designed to quickly help the businesses that need it most,” McGuire said.

Rep. Francesca Hong (D-Madison) abstained from voting on the legislation “to avoid any appearance of impropriety” because her restaurant received PPP funds. But she criticized the PPP tax break as skewed toward better-off businesses — with about 10% of companies receiving the deduction accounting for about half of the money that the state will forgo.  

“It is morally reprehensible to reward profitable businesses with a double tax benefit and not provide relief for those most vulnerable who, through no fault of their own in this worldwide pandemic, have not had access to financial solutions, may not have received the PPP loans and will be reporting severe losses,” Hong said.

The Assembly did make one addition to the bill that began as a Democratic amendment, allowing a tax exemption for ethnic minority businesses that received Wisconsin Economic Development Corp. (WEDC) emergency grants.

From the Assembly, the bill went to the state Senate, which concurred late Tuesday afternoon after rejecting Democratic amendments that mirrored the ones the Assembly had turned down.

“This is a benefit that benefits those who’ve already benefited,” said Sen. Chris Larson (D-Milwaukee), who introduced one of the Democratic alternatives and later voted against the overall bill.

But as the Senate got ready for its final vote, Sen. Roger Roth (R-Appleton) defended the bill in the face of the Democratic criticisms.

“What we are doing today is for 90,000 small businesses in the state of Wisconsin that struggled as a result of this virus through no fault of their own,” Roth said. “They did what was asked. They kept people on payroll and thank God they did.”