NC tax policy hurts small businesses that got PPP loans. Here’s what lawmakers must do
Thousands of small business owners in North Carolina who received Paycheck Protection Program money are being treated unfairly by the state.
It’s the fault of the N.C. General Assembly, which makes the tax law that the N.C. Department of Revenue enforces.
In 2020, the federal government passed the CARES Act to help people cope financially with the COVID-19 pandemic. One of the provisions in the CARES Act was the Paycheck Protection Program (PPP), which was intended to help businesses continue to pay employees even though the businesses had lower than normal income.
The final version of the federal law allowed businesses to deduct allowable PPP expenses for tax purposes, and it excluded PPP money from being taxed. This combination really provided financial support to the businesses.
As of Aug. 23, there are five states, including North Carolina, that either tax the proceeds from the Paycheck Protection Program or disallow the expense deduction. That means in those states the intended benefit of the program is severely diminished. The other four states are Florida, Nevada, Hawaii and Utah.
Thirty-eight other states and the District of Columbia follow the federal law, which benefits small businesses. Two states mostly follow it and three others follow it with modifications. Two remaining states have no personal or corporate income tax, so it’s not a factor.
At the close of fiscal 2020, the State of North Carolina announced that it has a $6.5 billion revenue surplus, yet the N.C. legislature has decided to tax every business that received a PPP forgiveness.
The General Assembly — both the N.C. House and Senate — have tried multiple times to correct this awful result, but have yet to agree on a solution.
This shouldn’t even be an issue. It would be very easy to merely follow the federal law, as 43 states and the District of Columbia are either fully or mostly doing.
On June 30, 2020, the General Assembly passed a law that changed the taxation of PPP forgiveness. That means, for example, that approximately seven of my clients will pay a combined total of more than $ 158,000 in tax to the State of North Carolina on the PPP forgiveness. These clients were among those hit hardest financially by the pandemic, such as restaurants. Others hit hard were retail merchants, doctors, dentists, and insurance agents.
The Small Business Administration recently published figures that show as of July 6, 2020 the SBA had approved 16,324 PPP loans in North Carolina over $150,000 per loan, totaling $5.8 billion.
Based only on those numbers, the State of North Carolina would receive more than $304 million in extra taxes. Is that fair?
Having to pay that will make it even more difficult for small businesses to recover from the pandemic. I question who is really benefiting from the state receiving such a windfall at this time.
Recent figures show that approximately 22,861 PPP loans over $150,000 were issued in North Carolina, as well as 242,523 smaller than $150,000. Among them were thousands of small business owners. I hope each one of them will contact the General Assembly and get N.C. legislators to correct this unfair tax.