In an unexpected windfall, New Jersey businesses that received federal grants through the Paycheck Protection Program (PPP) can now exempt the forgiven loan from state taxation and claim a deduction on expenses paid by the loan.
This unprecedented move would allow companies to receive a tax cut on both sides of the ledger – one for receiving the money, and another for spending it – costing New Jersey up to $688 million in lost personal income tax (PIT) revenue[1] and at least another $560 million in lost corporate business tax (CBT) revenue.[2] Of note and concern is the fact that this tax break is likely to disproportionately benefit white-owned businesses given the inequitable distribution of the original loans and difficulty that Black-owned businesses had in accessing the program.[3] Based on a sampling of PPP loans, more than 80 percent have been granted to white-owned businesses.[4] Black-owned businesses received less than 2 percent of the loans while 6.6 percent went to Hispanic-owned businesses, according to the Center on Public Integrity.
In light of the moral obligation to fund an equitable pandemic recovery, despite foreseeable revenue shortfalls in the not-so-distant future, lawmakers giving the green light to a $1.2 billion double tax cut on loan forgiveness raises serious concerns about the state’s ability to support other, potentially more urgent, needs.
Background
Last year, Congress created the Paycheck Protection Program, a large loan assistance program designed to help businesses and stabilize local communities during the COVID-19 crisis. So long as the loans were used for allowable business expenses like payroll and rent, the loan would be forgiven and converted to a grant.
Since expenses paid with PPP loans are exempt from taxation, the Internal Revenue Code (IRC) directed that they could not be deducted in calculating taxable income. In other words, PPP loan forgiveness was to be treated as tax neutral, which is standard practice.
Then, just days before the calendar year came to a close, federal legislation reversed that directive, granting businesses both tax exemption and deductibility of expenses covered by their PPP loans. This change turned PPP loan forgiveness into a net tax benefit. So, in addition to having wages reimbursed through forgiveness of the loan that paid for them, PPP recipients are now set to get a federal tax cut.
New Jersey plans to offer the same tax cut, even though it is under no obligation to do so. And the cost is staggering — more costly to New Jersey coffers than other tax breaks in the CARES Act and a larger amount than the projected revenue from the newly passed “millionaires tax” — because of how many PPP loans have been granted.
Conformity Matters
New Jersey businesses pay state taxes either through the corporate business tax code or the personal income tax code, depending on how they are incorporated. Each code regards the IRC differently.
The state’s personal income tax code does not use IRC as a starting point, and its treatment of loan forgiveness is already tax neutral. In other words, the forgiven loan is taxable, but the expenses associated with the loan can be deducted. A recent announcement by Governor Murphy changes this. Pass-through businesses with a forgiven PPP loan on the books can now avoid gross income taxation of the forgiven loan and be allowed to deduct associated payroll and other expenses as normal business expenses.
The state’s corporate business tax code already uses the IRC as a starting point, meaning the new federal treatment of PPP loan forgiveness will be automatically replicated at the state level. By choosing not to decouple from the IRC, New Jersey is on track to lose at least $560 million in revenue, based on the $6.9 billion in PPP loans granted to corporations in 2020.
The last-minute, bipartisan change at the federal level turned a tax-neutral program designed to protect jobs into a tax cut for businesses that received federal aid. But let’s be clear: that policy change does not mean that these businesses are entitled to receive an additional tax break here in New Jersey. The state has to affirmatively choose to do so, which it has, thus weakening its ability to fund other needs central to pandemic recovery. Worse yet, thanks to the racial inequities of PPP disbursement, it will inherently exacerbate disparities among businesses ravaged by the economic downturn.
End Notes
[1] Legislative Fiscal Estimate on S3234, December 28, 2020. https://www.njleg.state.nj.us/2020/Bills/S3500/3234_E2.PDF
[2] Based on $6.9 billion in PPP loans granted to NJ corporations in 2020.
[3] Boston Business Journal, PPP data shows Black-owned businesses received fewer loans, despite efforts, December 29, 2020. https://www.bizjournals.com/boston/news/2020/12/29/updated-ppp-data-shows-black-owned-businesses.html
[4] The Center on Public Integrity, Small Businesses Loan Data Includes Little About Race, July 2020. https://publicintegrity.org/health/coronavirus-and-inequality/small-business-loan-data-includes-little-on-owners-race-paycheck-protection-program/
