PROVIDENCE – Melody Majkut went from a feeling of relief when her business received a federal Paycheck Protection Program loan to shock after she learned that the company could be taxed on the money.
Majkut and her husband, Mark, have operated M&G Trucking and Transportation Inc. in Pawtucket for 27 years. The company, which delivers general freight to as far away as Texas, received two $450,000 PPP loans, which she said “arrived in the nick of time” to save the business. Now, she is concerned of the burden to the business in having to pay $45,000 in taxes on the forgiven loans.
“That could be devastating for us,” said Majkut, noting that the loans have been a lifeline and kept her 30 drivers employed. “I thought it was a gift from god. Now they want us to pay a tax on it. That’s a big blow.”
Majkut said when the company received the PPP loans it was instructed to use it for payroll.
“We gave it all out in payroll to our people, because when the first PPP loan came, we were going to have to layoff someone that week,” she said. “We did not have the work to support everybody. There was no work – everything had shut down.”
The PPP loan enabled M&G Trucking to keep operating. “It was an amazing gift from God that saved us just in the nick of time,” she said. “So, it kept us stable.” The company has not laid off any of its employees.
“Now, to be told you have to pay tax on that – I was shocked to hear that,” she said, referring to the governor’s budget proposal.
In a shift from policy established before he became governor, Gov. Daniel J. McKee has proposed taxing forgiven Paycheck Protection Program loans that are greater than $150,000. The governor’s office says the change would generate an estimated $67.7 million in revenue for the state, over two fiscal years.
General Assembly leadership has so far taken a neutral position on PPP loan taxation, noting that they would be reviewing testimony while listening to the perspective of the state’s small businesses.
Senate President Dominick J. Ruggerio said, “I look forward to the Finance Committee hearing on the governor’s proposal to change the tax structure regarding PPP loans, and to hearing from the small businesses who would be impacted.”
House Speaker K. Joseph Shekarchi says he’s aware of the governor’s proposal and the concerns of the business community.
“I will review the testimony provided at the House Finance Committee hearing and the normal due diligence that is being conducted by the committee,” he added.
At an April 7 hearing on the proposed legislation in the House, lawmakers raised questions concerning the proposed legislation, known as House bill 6121. The legislation is part of McKee’s 2021 supplemental budget proposal aimed at tackling the state’s budget deficit.
Rep. Carol Hagan McEntee, D-Narragansett, voiced opposition, noting she has introduced House bill H6170, which would exempt from taxation any loan forgiveness under the federal Paycheck Protection Program. She asked McKee not to tax the approximate 2,200 business that could be impacted by the proposed legislation.
Jim Thorsen, director of the R.I. Department of Revenue, said at the hearing the governor’s proposal would affect a small percentage of companies – “fewer than 1% of for-profit businesses with PPP loans forgiven would be impacted by this provision in 2020, and fewer than 15% in 2021.”
Rep. Carlos E. Tobon, D-Pawtucket, responded that, “When we say that a small number of businesses will be affected, the bottom line is, they will be affected.”
Tobon asked what should be done when a company no longer has any money since it went toward paying for employees.
“I have a constituent that has a successful trucking company that grosses a lot, but trucks are extremely expensive to maintain,” said Tobon, referring to M&G Trucking. “As our economy was shutting down, they were using their personal income, their savings, to keep their business going in anticipation of receiving the PPP loans. Now, that would be their personal income and they have nothing to show for it, because it all went out to their employees.”
In response, Thorsen said, “Well, the fact is, you don’t pay taxes if you don’t make money under this program.”
“They’re showing almost a $1 million in revenue,” said Tobon. “But the amount of work they were getting had been lessened dramatically. So, all this did was create a bridge. And it might show they received income, but this would fall on the owners, and since they’re an S-Corporation – it goes through their personal income.”
Tobon said that “concerns” him, because companies needed the PPP loans, and a lot of the companies don’t have the money to pay the tax. “They’re going to have to get loans to pay back their loan.”
Thorsen said “the situation is that people who didn’t take [the PPP] loans pay the taxes. So, it doesn’t seem fair that the people that got loans get a double tax break.”
Tobon said some businesses were being prudent in not opting to take the loan, but other businesses took it to remain solvent. “We can’t punish those who were trying to survive,” he said.
For Majkut, the PPP loans meant keeping the doors of her business open. “I was so thankful I was able to maintain my employees,” she said. The loans “did what they were supposed to do – it kept everybody employed. It worked.”
(MINOR edits throughout.)
Cassius Shuman is a PBN staff writer. Email him at Shuman@PBN.com.
Regardless of what Mr. Thorson says, the Federal Government gave this money to RI small businesses to keep them for laying people off and keep their businesses operating. They did not do it to create a windfall for state governments. Companies invested in their employees and their businesses and now RI see this as an unexpected taxing opportunity.
Let’s hope that they have a loan program ready to go to lend small businesses the money they need to pay these taxes.