On Monday, Republicans introduced a measure to relieve New Hampshire businesses of taxes related to Paycheck Protection Program revenue after the Department of Revenue Administration issued guidance advising businesses that forgiven loans would be taxable at the state level. Democrats appeared to be on board with the proposal, despite a projected loss of tax revenue for the state.
“PPP funds were designed to keep the American economy afloat during the significant uncertainly of the pandemic; it was never meant to be a taxable event,” said State Senate Majority Leader Jeb Bradley, a Wolfeboro Republican. “There was never any intention to create revenue loss to New Hampshire.”
The federal government passed a corrective measure in December to ensure PPP monies wouldn’t be taxable through the IRS. In New Hampshire, the state’s tax code is not automatically tied to newly passed Internal Revenue codes. Instead, the state tax code is based on 2018’s IRC – which treats forgiven loans as taxable revenue.
“At the federal level, the Internal Revenue Code was amended. What that law did was allow businesses that received PPP to not include the forgiven loan amount in their gross income,” Commissioner of the DRA Lindsey Stepp said, adding they’re also allowed to deduct expenses against that revenue, which amounts to a “double benefit” at the federal level.
In New Hampshire, she said, we’re tied to the 2018 version, which forces businesses to include the forgiven amounts in their gross revenue numbers. Like the federal revenue code, businesses can deduct expenses against that revenue.
Therefore, Stepp said, employers who used PPP loans for payroll as the program was designed would have no profits tax liability. The only way, she said, that businesses would face taxes on those forgiven loans is if employers didn’t use it for payroll or business expenses and would owe Business Profits Taxes on those funds.
“When the pandemic hit, our state unemployment rate skyrocketed to above 15 percent, but in large measure, due to the Payroll Protection Program, our economy has come back, our unemployment rate is under 4 percent, and businesses were able to do what the PPP was designed to accomplish, keeping hard-working men and women in New Hampshire on the job and not having to apply for unemployment,” Sen. Bradley said.
“While things are improving, the pandemic and its negative effects will be with us for a while. We need to keep supporting our Main Street businesses and not undermine our economic recovery underway in New Hampshire. SB3 will help to do just that,” Bradley added.
The Senate heard the measure Monday morning after the Senate Rules Committee approved the measure’s late drafting, now Senate Bill 3, unanimously. A fiscal note attached to the bill estimates that the bill could cost the state up to $134.9 million in BET & BPT revenue.
“The committee needs to look at the fiscal note and test those assumptions,” Bradley testified, again reiterating that PPP loans were never intended to be taxable.
Ways and Means Committee member Senator Cindy Rosenwald, a Nashua Democrat, said she agreed that businesses should not be taxed on these loans that have helped keep the economy afloat. Simultaneously, she worried about the revenue impacts and noted that the NH DRA said including these in the tax base has helped New Hampshire avoid the deficit predicted by Governor Sununu last summer.
“How might we pay for this?” she asked of Bradley. “What can we do without?”
“I think businesses in New Hampshire,” Bradley said, “are somewhat surprised and concerned that it could be [taxed] in New Hampshire but for this clarification.”
Senator Lou D’Allesandro said the fiscal note was “as complicated as I’ve ever seen” and noted that you’d need to be a “tax expert” to understand it. “And I’m no tax expert,” he said.
“It’s certainly one of the most complicated we’ve ever done,” Stepp said of the fiscal note, saying the department had to make a few assumptions regarding the measure because the funds from PPP are impossible to track through the entire flow structure, which also includes taxable apportionment for businesses that operate in multiple states.
“The intent of this money was to stimulate the economy,” D’Allesandro said to Bradley. “And taxing this could be counterproductive.”
“It certainly has helped to [prop up the economy] here in New Hampshire,” Bradley agreed. “I don’t think we want to start undermining the opportunity for recovery, and making this taxable would do that.”
The Senate appears poised to pass the measure easily. The House seems eager to join in as well.
“In order for businesses to survive through this pandemic, they have relied on funds, such as the PPP, that will not be taxed by the federal government and should not be treated any differently at the state level. It has been a priority of House Republicans to find a solution to protect our hardworking men and women without saddling them with additional taxes, and we support finding a solution to fix this mess,” said Majority Leader Jason Osborne (R-Auburn) in a statement.
“At the same time, I am also glad to see Senator D’Allesandro is finally on board with business tax relief,’ continued Osborne. ‘I trust he and Senate Democrats will also support HB10 to reduce the Business Profits Tax and Business Enterprise Tax in order to help those struggling New Hampshire businesses that did not get the benefit of a federal bailout.”
“NH House Republicans will ensure that our employers will not have to pay state taxes on the CARES Act help they received,” said Rep. Laurie Sanborn (R-Bedford). “So many NH businesses are struggling mightily to survive due to the pandemic. Getting a big tax bill this Spring would be devastating to them. We want to do everything we can to give them confidence that they can thrive again. It will take legislative action to adopt the federal policy regarding the tax-free nature of COVID-related aid for businesses, which we will do.”