PROVIDENCE – Rhode Island business leaders are painting a gloomy picture for the state if Gov. Daniel J. McKee’s proposal to tax forgivable Paycheck Protection Program loans is enacted by the R.I. General Assembly.
McKee appears to have shifted his stance on PPP taxation and is considering raising the threshold for taxation on for-profit businesses who took the loans from $150,000 up to $300,000. In his budget proposal in March, McKee called for the taxation of businesses over the $150,000 threshold, which equates to 3,794 of the state’s businesses.
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Melissa Travis, CEO and president of the R.I. Society of Certified Public Accountants, and a leading advocate for the R.I. Business Coalition, told the Providence Business News that PPP taxation could collapse the economy.
“If you have retroactive tax policy it sets a bad precedent and will eventually lead to a collapsing of the economy,” she said, noting that the taxation of forgivable PPP loans is akin to moving the goalposts on businesses that are struggling to survive.
Travis said the stories of business facing hardships are numerous, including 20 businesses that she represents, which employ between 60 to 80 workers combined, and are teetering on the brink of bankruptcy.
Travis said most businesses do not have the ability to hire an accountant to amend their tax filings, nor pay what is owed and many business owners are taking out second and third mortgages to aid their bottom line.
What legislators don’t understand, she said, is that a company employing about 10 workers at $25,000 per year in salary, accounts for a payroll expense that exceeds $150,000. This type of business is making very little in the way of profit, she said.
“If you knew this as a business owner, would you have even taken the loan?” she said. “You were better off financially to stay closed – because now you’re not getting the benefit.”
Bob Nangle, co-owner and president of East Greenwich-based Meridien Printing, said his company wrestled with the idea of shutting down, but thought it better to keep his employees on payroll. Nangle, who has owned the business for more than 20 years, received a PPP loan of $780,000 to keep his workforce employed.
“It’s a big slap in the face when you do what they ask you to do and then they turn around and tax you on it,” said Nangle. “We were asked not to layoff any employees to avoid putting them on unemployment insurance, as [the benefit] was overwhelmed. They said the money is available to you, use that to pay your employees.”
Nangle said his company was able to keep 55 of its 60 employees, even though there was the enticement for workers to go on unemployment insurance and collect an additional $600 in federal stimulus funds. The Catch 22, he said, was that if the company laid off any of its employees they might not have returned.
Now his company has tax liability, which could lead to the need to cut some aspect of the business, he said. “Whatever this tax is going to be that we would have to pay – $20,000, $30,000 or $40,000 – we’re going to have to come up with a way to offset that.”
“We’re not profiting off of the PPP,” he said, noting that his business, which is a leverage company, has depreciation expenses annually. “If you take the true description of what you were supposed to use the PPP money for, I don’t see how that comes back to saying that it made you more profitable.”
John Hazen White, chairman of Taco Comfort Solutions, whose Cranston-based company was an essential business during the pandemic due to the fact that it manufactures hot water products, said the PPP loan of $8.2 million the business received prevented laying off any of its 480 employees.
White said his company would not have taken the loan if he knew the rules were going to change. “The people who took these loans, it doesn’t matter what size the loans were, they took them in good faith,” he said, noting that his company could now be getting penalized for it.
As for retroactive taxation, White said a state lawmaker told him companies will be not be taxed on the PPP loan, but rather the “incremental profitability” achieved because of the PPP loan. White said his response was that it would be impossible for an accountant to determine the profitability amount.
“How can you tell me what portion of my profitability was a result of that loan?” said White. “There is not an accountant in the world that can do that. There is no sensibility to what is happening with this proposal for taxation.”
Despite the issues facing businesses, White and others say the governor is listening to their concerns. Conversations with business leaders over the past week or so led McKee to shift his stance and begin rethinking PPP taxation, while undertaking a review of the threshold.
“It came from dialogue we had in his office and a couple of private phone calls that he and I had,” said Dave Chenevert, noting his longstanding relationship with the governor, who was mayor of Cumberland when he served on the town council.
Chenevert, who is director of the R.I. Business Coalition, and executive director of the R.I. Manufacturers Association, voiced opposition to PPP taxation along with other business leaders at a rally-like event held by the coalition in Cranston on June 7. During the meeting, some business leaders said they met with the governor, and he was listening to their concerns.
“We have a different viewpoint on the PPP taxation issue,” said Chenevert of the governor. “I know what he’s trying to do. [PPP taxation] was part of his original budget, but things have changed, and I think he is taking a full assessment of all of that. So, I give him credit.”
Chenevert has said that PPP taxation will impact 2,500 businesses which have fewer than 50 employees. The data, he said, is gleaned from public information provided by the Small Business Administration.
The SBA reports that state businesses received about 17,282 in PPP loans to date totaling more than $1 billion.
Chenevert said his biggest concern is the state balancing the budget on the backs of the business community. He feels there should be no taxation, so raising the threshold will still impact a portion of the business community.
Chenevert also said the state has more revenue now, due to the surplus, and pandemic relief, so taxation of businesses is not needed.
Chenevert is referring to the Office of Management and Budget’s projection that the state has a revenue surplus more than $416 million for the fiscal year ending June 30, and nearly $150 million in additional revenues for fiscal years 2021 and 2022. The state will also be receiving $1.78 billion in federal stimulus funds per the American Rescue Plan.
John Simmons, spokesman for the R.I. Business Coalition, said that McKee has expressed an interest in reviewing the impact of raising the threshold to as high as $300,000. The coalition’s position is firm on advocating for no taxation on PPP loans at all.
“[The governor] is saying let’s increase the threshold,” said Simmons. “Instead of $150,000, let’s make it something else. But we don’t know what the order of the magnitude of that would be if the threshold is changed to $300,000.”
Simmons said altering the threshold still unfairly taxes the business community. He said if a company received an $8 million PPP loan it has a tax liability. The larger PPP loans are the ones that would be hurt the greatest by taxation, he said.
“Most of the companies don’t have the money to pay the tax,” said Simmons. “It’s still a lot of money. It’s still not a good tax. Increasing the threshold doesn’t make it go away.”
Simmons said that what McKee has learned through the budget process is that it is his choice as governor if he wants to impose taxation or not.
“It’s his choice,” said Simmons. “If he stays where he is on it, he owns it.”
Taxation of for-profit businesses that received PPP loans would raise about $67 million over a two-year span. About 1% of businesses would be affected by the governor’s proposal in the 2020 tax year, with taxation increasing to 15% in 2021.
The state budget, including the governor’s proposal, is scheduled to be voted on before the legislative session ends on June 30.
Cassius Shuman is a PBN staff writer. Contact him at Shuman@PBN.com.
Smart business owners should have realized that there is no free lunch and that there was a high probability that eventually the taxman would come knocking at their door, if the loans were not repaid. Forgiveness of debt results in taxable income. The folks that helped the businesses apply for the PPP loans should have given the biz owners a heads up as should have their accountants and CPAs.
In the ordinary course, loans that are forgiven would rightfully be taxed. However, these were not ordinary times and not ordinary loans. The loans helped keep the unemployment system from being overwhelmed and helped keep as many workers on the employer’s payroll. It was a win-win. Employers would have made different decisions had the State been upfront that these would be taxed. To change the rules, especially after the state received a huge Federal windfall is simply unconscionable. Let’s focus on policies and taxation that encourages businesses to come to (and stay in) RI and grow! Rhode Island is falling back to its old ways —tax, tax and tax again. Good luck with that approach! What’s next? Cooler and Warmer?