ENTERPRISE – A squeeze is being put on some Utah businesses hit hardest by the pandemic. Business owners are learning they could owe tens of thousands of dollars after they accepted financial aid to keep their businesses going.
You'll remember that the entire point of the Paycheck Protection Program was to funnel money into businesses so they could keep their doors open and their employees employed. From the beginning, it was sold by lawmakers in Washington as money that wasn't going to have to be paid back.
But in a striking juxtaposition, it's now becoming clear that, in Utah, much of that money is going to be paid back in the form of taxes.
Lee Bracken said the $90,000 in PPP money he got through the federal CARES Act kept the doors open on his southern Utah convenience store and let him pay employees to stay home when they came down with COVID-19. For Bracken, it worked exactly as designed.
"It allowed us to do what it was intended," he said.
But now — sticker shock. His accountant broke the bad news that Utah law does not jive with federal law, and the PPP money he received is being taxed as income. He'll owe the state about 5% — several thousand dollars.
Bracken is among a handful of business owners from whom the KSL Investigators have heard, all expressing they are surprised and disappointed by the Utah tax burden as they continue to struggle to stay in business.
Utah tax commissioner John Valentine said that the way the U.S. Treasury Department is handling it allows businesses to "double-dip." Not only are the loans forgiven, but business expenses paid with the loans can be written off.
"If people use the money as it was intended, it should be neutral," he said. "The way the federal government has treated, it's a tax benefit that turns out to be an additional subsidy."
He defends Utah's position to treat loan forgiveness at taxable income.
"It is actually sound practice to say that you do not double-dip," Valentine said. "They'd have tax free income, plus take deductions against other income."
It is actually sound practice to say that you do not double-dip. They'd have tax free income, plus take deductions against other income.
–John Valentine, Utah tax commissioner
Allowing "double-dipping" at the federal level is a rule the feds changed at the eleventh hour.
"Utah was totally aligned with the federal government up until Dec. 27 when they changed the rules," Valentine said. "And they changed the rules in a way that never been changed before."
Valentine said the way the feds are doing it is especially unfair to the businesses who wanted a loan but didn't get one before the money ran out.
"Congress actually did us no favors on this," he said.
Tanner Marchant, a CPA with Gibbons & Associates in Farmington, said Congress' action in late December shows they never intended for the PPP loan forgiveness to be taxable.
From last month:
He thinks Utah is being greedy.
"Utah has always followed the lead of the IRS, so why are they changing now?" Marchant said. "I think, from a budgetary standpoint, they saw that they could get an additional 5% on the PPP loan forgiveness."
Marchant said it's the Utah Legislature that is 'double-dipping' because they're collecting tax revenue from the wages earned by the employees that stayed employed because of the PPP loans and then they're also taxing small business owners on the loan forgiveness.
"Some small businesses are truly struggling and, in a sense, drowning," Marchant said. "Rather than throwing them a life vest, Utah lawmakers are throwing them an anchor."
Some small businesses are truly struggling and, in a sense, drowning. Rather than throwing them a life vest, Utah lawmakers are throwing them an anchor.
–Tanner Marchant, CPA, Gibbons & Associates
Bracken said he sees this as a windfall for the state of Utah on the backs of businesses still struggling to make ends meet who didn't have any time to prepare. He added he'll be able to meet his tax burden, but he's worried about other businesses.
"I am really worried that the ramifications and the impact of small businesses throughout the state," he said. "This will be just one more hardship for them to endure."
One way a business can avoid paying taxes on the PPP loans would be to pay the loans back — which is, of course, impossible for a lot of businesses that only applied for the money to be able to stay afloat.