SIOUX FALLS, S.D. (KELO) — Congress is expected to work through the weekend in an effort to pass a second coronavirus relief package. It could include an important tax break for thousands of small business owners who received money from the Paycheck Protection Program.
“Quite frankly, it saved some businesses, the funds were very much needed,” Sioux Falls CPA Chuck Nelson said.
When the coronavirus pandemic shut down businesses across the country this spring, congress passed the Paycheck Protection Program.
“That was a tremendous lifeline that protected 40 million American jobs in this country,” South Dakota Representative Dusty Johnson said.
“These funds were received by businesses to help continue paying employees that were sent home because they didn’t have any work. Those employees would not have received pay if it wasn’t for those PPP funds,” Nelson said.
The business owners accepting these funds were initially told they would be tax free.
“Later on the IRS came along and said that the expenses that businesses paid for with those PPP dollars like labor costs, paycheck costs, were not going to be able to be deducted on their taxes against their business income,” Johnson said.
“There are businesses out there that are actually going to be in a worse position now by accepting that money than if they didn’t even accept it,” Nelson said.
Nelson says the IRS tax change to the PPP could cost small business owners thousands of dollars.
“If a business did not have any income prior to these funds and say they accepted $100,000 in PPP funds and now paid those funds to employees that were staying at home that they wouldn’t have necessarily paid in the past, and they can’t deduct those expenses, now they have $100,000 profit. Zero profit before, now $100,000, which means they could be paying roughly $37,000-$38,000 tax on that that they wouldn’t have had to pay before,” Nelson said.
It’s why he’s been working with South Dakota’s congressional leaders for months to ensure the PPP funds are truly tax free during this still difficult season for many businesses.
“Right now we only have a few weeks left until the end of the year and we’re trying to do tax planning without knowing what the rules are,” Nelson said.
“I have been fighting for weeks and frankly for months to change the tax treatment of those PPP dollars,” Johnson said.
Representative Johnson says the tax clarification is included in the coronavirus relief package he expects the House to vote on this weekend.
“If we want to make sure the economy continues to grow and we haven’t pulled a bait and switch on South Dakota small businesses, we need to make sure the IRS does the right thing. We have been successful in getting that critically important provision into this package and when it passes this weekend it’s going to be a nice bit of relief for small businesses in South Dakota,” Johnson said.
Senator John Thune is also in favor of changing PPP taxes; he co-sponsored the Small Business Expense Protection Act in May.
“Small businesses throughout the country are struggling to keep their doors open due to the COVID-19 pandemic. That’s why I’ve cosponsored legislation to ensure that businesses that received a Paycheck Protection Program loan can deduct their business expenses, as Congress intended, and aren’t stuck with a surprise tax bill. I’ll continue to fight for small businesses – the backbone of South Dakota’s economy – as Congress works to pass additional COVID relief,” Senator Thune said.
Representative Johnson says when it comes to the PPP tax issue, there hasn’t been a lot of partisan debate in Washington.
“Democrats and Republicans alike understood that it would have been tremendously unfair to provide this support to small businesses, this money went to their employees, and then claw so much of it back in the form of taxes at a time when we want businesses to continue to invest in their employees,” Johnson said.
Still, with just two weeks left in the year, Congress has not yet passed legislation that would correct this tax issue they’ve known about for months.
“We’ve already gone six or seven months without any action, so right now I’m in favor on any type of action to get this thing passed,” Nelson said. “If this doesn’t pass, then we’ve got businesses that are going to end up with a higher tax liability than they were anticipating when they received the PPP funds.”
Johnson says he’s confident the entire covid-19 package will pass yet this year.
“I expect it will be this weekend, but let’s make one thing very clear, Congress should not go home for Christmas until we finish our work,” Johnson said.